\^
REVIEW OF THE ADMINISTRATION'S FEDERAL
CROP INSURANCE REFORM PROPOSAL
Y4.AGB/l;103-60/PT.l
Revieu of the Adninistration's Fede.
HEARINGS
BEFORE THE
SUBCOMMITTEE ON ENVIRONMENT, CREDIT,
AND RURAL DEVELOPMENT
OF THE
COMMITTEE ON AGRICULTURE
HOUSE OF REPRESENTATIVES
ONE HUNDRED THIRD CONGRESS
SECOND SESSION
MARCH 25, 1994
APRIL 5, 1994, LUVERNE, MN
APRIL 21, 1994
Serial No. 103-60
PART 1
n..
L' C V/ I 0 <v^\,,- J
Printed for the use of the Committee on Agricultixre
U.S. GOVERNMENT PRINTING OFFICE
81-128 WASHINGTON : 1994
For sale by the U.S. Government Printing Office
Superintendent of Documents. Congressional Sales Office, Washington, DC 20402
ISBN 0-16-046037-9
.'-N
REVIEW OF THE ADMINISTRATION'S FEDERAL
CROP INSURANCE REFORM PROPOSAL
Y4,AG8/l;103-60/PT.l
Revieu of the Adninistration's Fede...
HEARINGS
BEFORE THE
SUBCOMMITTEE OX EMIROXMEXT, CREDIT,
AND RURAL DEA^LOPMEXT
OF THE
COMMITTEE ON AGRICULTURE
HOUSE OF REPRESENTATIVES
ONE HUNDRED THIRD CONGRESS
SECOND SESSION
MARCH 25, 1994
APRIL 5, 1994, LUVERNE, MN
APRIL 21, 1994
Serial No. 103-60
PART 1
DEC 1 3 ..,. .
Printed for the use of the Committee on Agriculture
U.S. GOVERNMENT PRINTING OFFICE
81-128 WASHINGTON : 1994
For sale by the U.S. Government Printing Office
Superintendent of Documents. Congressional Sales Office, Washington, DC 20402
ISBN 0-16-046037-9
COMMITTEE ON AGRICULTURE
E (KIKA) DE
GEORGE E. BROWN, Jr., California,
Vice Chairman
CHARLIE ROSE, North Carolina
DAN GLICKMAN, Kansas
CHARLES W. STENHOLM, Texas
HAROLD L. VOLKMER, Missouri
TIMOTHY J. PENNY, Minnesota
TIM JOHNSON, South Dakota
BILL SARPALIUS, Texas
JILL L. LONG, Indiana
GARY A. CONDIT, CaUfomia
COLLIN C. PETERSON, Minnesota
CALVIN M. DOOLEY, CaUfomia
EVA M. CLAYTON, North CaroUna
DAVID MINGE, Minnesota
EARL F. HILLIARD, Alabama
JAY INSLEE, Washington
THOMAS J. BARLOW III, Kentucky
EARL POMEROY, North Dakota
TIM HOLDEN, Pennsylvania
CYNTHIA A. McKINNEY, Georgia
SCOTTY BAESLER, Kentucky
KAREN L. THURMAN, Florida
SANFORD D. BISHOP, Jr., Georgia
BENNIE G. THOMPSON, Mississippi
SAM FARR, CaUfomia
PAT WILLIAMS, Montana
BLANCHE M. LAMBERT, Arkansas
LA GARZA, Texas, Chairman
PAT ROBERTS, Kansas,
Ranking Minority Member
BILL EMERSON, Missouri
STEVE GUNDERSON, Wisconsin
TOM LEWIS, Florida
ROBERT F. (BOB) SMITH, Oregon
LARRY COMBEST, Texas
WAYNE ALLARD, Colorado
BILL BARRETT, Nebraska
JIM NUSSLE, Iowa
JOHN A. BOEHNER, Ohio
THOMAS W. EWING, IlUnois
JOHN T. DOOLITTLE, CaUfomia
JACK KINGSTON, Georgia
BOB GOODLATTE, Virginia
JAY DICKEY, Arkansas
RICHARD W. POMBO, California
CHARLES T. CANADY, Florida
NICK SMITH, Michigan
TERRY EVERETT, Alabama
Professional Staff
DiANNE Powell, Staff Director
Vernie Hubert, Chief Counsel and Legislative Director
Gary R. Mitchell, Minority Staff Director
James A. Davis, Press Secretary
Subcommittee on Environment, Credit, and Rural Development
TIM JOHNSON,
JILL L. LONG, Indiana,
Vice Chairman
EVA M. CLAYTON, North Carolina
DAVID MINGE, Minnesota
THOMAS J. BARLOW III, Kentucky
EARL POMEROY, North Dakota
TIM HOLDEN, Pennsylvania
CYNTHIA A. McKINNEY, Georgia
KAREN L. THURMAN, Florida
TIMOTHY J. PENNY, Minnesota
BILL SARPALIUS, Texas
COLLIN C. PETERSON, Minnesota
EARL F. HILLIARD, Alabama
JAY INSLEE, Washington
SCOTTY BAESLER, Kentucky
BENNIE G. THOMPSON, Mississippi
SAM FARR, California
South Dakota, Chairman
LARRY COMBEST, Texas
STEVE GUNDERSON, Wisconsin
WAYNE ALLARD, Colorado
BILL BARRETT, Nebraska
JIM NUSSLE, Iowa
THOMAS W. EWING, IlUnois
JAY DICKEY, Arkansas
RICHARD W. POMBO, CaUfomia
NICK SMITH, Michigan
(II)
CONTENTS
March 25, 1994
Page
Barrett, Hon. Bill, a Representative in Congress from the State of Nebraska,
opening statement 4
Combest, Hon. Larry, a Representative in Congress from the State of Texas,
opening statement 3
Ewing, Hon. Thomas W., a Representative in Congress from the State of
IlUnois, opening statement 5
Johnson, Hon. Tim, a Representative in Congress from the State of South
Dakota, opening statement 1
Minge, Hon. David, a Representative in Congress from the State of Min-
nesota, opening statement 3
Penny, Hon. Timothy J., a Representative in Congress from the State of
Minnesota, opening statement 5
Smith, Hon. Nick, a Representative in Congress from the State of Michigan,
opening statement 6
Witnesses
Ackerman, Kenneth D., Manager, Federal Crop Insurance Corporation, U.S.
Department of Agriculture 8
Prepared statement 37
Moos, Eugene, Under Secretary, International Affairs and Commodity Pro-
grams, U.S. Department of Agriculture 7
Prepared statement 34
April 5, 1994, Luverne, MN
Johnson, Hon. Tim, a Representative in Congress from the State of South
Dakota, opening statement 79
Minge, Hon. David, a Representative in Congress from the State of Min-
nesota, opening statement 81
Peterson, Hon. CoUin C, a Representative in Congress from the State of
Minnesota, opening statement 81
Written response from U.S. Department of Agriculture 152
Witnesses
Ackerman, Kenneth D., Manager, Federal Crop Insurance Corporation, U.S.
Department of Agriculture 82
Prepared statement 133
Buschette, Francis, on behalf of the Minnesota Association of Wheat Growers 98
Prepared statement 161
Christopherson, Al, president, Minnesota Farm Bureau Federation 96
Prepared statement 154
Crowley, Mike, agent. Crop Agency, Inc 108
Prepared statement 174
Frederickson, David J., president, Minnesota Farmers Union 101
Prepared statement 168
Gyberg, Stan, farmer, Luverne, MN 127
Keister, John R., Blue Earth, MN 122
Prepared statement 203
Kleven, Bruce M., staff attorney. Farmers' Legal Action Group, Inc 124
Prepared statement 207
Lacey, Gerald, president. National Barley Growers Association 100
(in)
IV
Page
Lacey, Gerald, president, National Barley Growers Association — Continued
Prepared statement 164
Lewis, Jim, Luverne, MN 125
Lindholm, Steve, president, Farmers & Merchants State Bank of Clarkfield,
Clarkfield, MN Ill
Prepared statement 191
Marin, Donald R., agent and owner, Marin-Biel Insurance, Inc., on behalf
of the National Association of Professional Insurance Agents 110
Prepared statement 181
Peterson, Richard, on behalf of the Minnesota Com Growers Association
and the Minnesota Soybean Growers Association 98
Prepared statement 157
Smestad, Eugene C, branch manager/insurance director, Farm Credit Serv-
ices of Fargo, Valley City, ND 114
Prepared statement 197
White, Randy, State representative. North Central Crop Insurance, Inc 129
Willers, Mack, farmer, Beaver Creek, MN 128
Submitted Material
Weber, William V, mayor, city of Luverne, MN, letter of April 1, 1994 214
Wheelock, Greg, Crop Insurance Services, comments and suggestions 215
April 21, 1994
Allard, Hon. Wayne, a Representative in Congress from the State of Colorado,
opening statement 222
Combest, Hon. Larry, a Representative in Congress from the State of Texas,
opening statement 221
Johnson, Hon. Tim, a Representative in Congress from the State of South
Dakota, opening statement 219
Pomeroy, Hon. Earl, a Representative in Congress from the State of North
Dakota, prepared statement 223
Sarpalius, Hon. Bill, a Representative in Congress from the State of Texas,
opening statement 222
Witnesses
Bums, Phil, president. Farmers and Merchants National Bank, West Point,
NE, on behalf of the American Bankers Association 235
Prepared statement 268
Conneab^, Michael, on behalf of Rvu-al Community Insurance Services, Inc 254
Prepared statement 297
Diedrich, Larry, president, American Soybean Association 233
Prepared statement 265
Hart, James F., president and CEO, Hand County State Bank, Miller, SD,
on behalf of the Independent Bankers Association of America 237
Prepared statement 271
Joyce, John H., chairman, American Association of Crop Insiu-ers 256
Prepared statement 302
Merja, Chuck, secretary/treasurer, National Association of Wheat Growers 239
Prepared statement • 277
Mitchell, Myrl, chairman, crop insurance advisory task force. National Cotton
Council of America 241
Prepared statement 282
Odom, Bob, commissioner, Louisiana Department of Agriculture and Forestry,
and president. National Association of State Departments of Agriculture 224
Prepared statement 262
Ozer, Katherine, director. National Family Farm Coalition 243
Prepared statement 286
Parkerson, Robert, president. National Crop Insurance Services 258
Prepared statement •• •. ^28
Rahjes, Doyle, president, Kansas Farm Bureau, and board member, American
Farm Bureau Federation 245
PrGD^TGci stfltdTiGnt ^yu
Rudisill, Thomas A, chairman. Crop insurance Research Bureau, Inc 259
Prepared statement ^^^
V
Page
Swenson, Leland, president, National Farmers Union, presented by Nancy
F. Danielson, legislative analyst 247
Prepared statement 293
Submitted Material
American Agriculture Movement, et cetera, letter of April 19, 1994 336
American Association of Nurserymen, statement 337
Barr, Terry N., chief economist. National Council of Farmers Cooperatives,
statement 342
Dakota Rural Action, statement 345
Fender, Douglas H., executive director, American Sod Producers Association,
statement 347
Mosier, Rodney, executive assistant, Texas Wheat Producers Association, let-
ter of March 28, 1993 354
National Sunflower Association, statement 350
Nodland, Randolph, Dakota Resource Council, statement 352
Orwig, Deanna, National Association of Crop Insurance Agents, letter of
April 20, 1994 357
Panetta, Leon E., Director, Office of Management and Budget, letter of April
14, 1994 389
Plains Cotton Growers, Inc., statement 390
Weber, William, R., president and chief executive officer. Farm Credit Coun-
cil, statement 393
REVIEW OF THE ADMINISTRATION'S FED-
ERAL CROP INSURANCE REFORM PRO-
POSAL
FRroAY, MARCH 25, 1994
House of Representatrts,
Subcommittee on Environment. Credit.
AND RUR-AL DEV-ELOPMENT,
Com^httee on Agriculture,
Washington, DC.
The subcommittee met, pursuant to call, at 10:35 a.m., in room
1302, Longv-'orth House Office Building, Hon. Tim Johnson i chair-
man of the subcommittee I presiding.
Present: Representatives Minge, Pomeroy, Penny, Peterson, Corn-
best, Gunderson. Barrett, Ewing. and Smith of Michigan.
Staff present: Glenda L. Temple, clerk; Anne Simmons and Da\id
Ebersole.
OPENING STATEMENT OF HON. TIM JOHNSON, A REPRESENT-
ATIVE IN CONGRESS FROM THE STATE OF SOUTH DAKOTA
Mr. Johnson. We will bring the Subcommittee on Environment,
Credit, and Rural Development to order.
I have called this hearing to re\'ie\v the administration's com-
prehensive proposal, the Federal Crop Insurance Reform Act of
1994, for the reform of our Nation's crop insurance program. The
need for reform has been apparent to me for some time, and was
dramatized as I toured the Midwest flood States this past summer
and listened to the many concerns of the producers throughout the
region.
Currently, clearly, our Government is involved in a dual system,
one of crop insurance, the other of ad hoc crop disaster paNinents:
and frankly, neither of them work as well as they ought. The gen-
eral consensus is that the crop insurance program is not fully ade-
quate to the needs of American farmers.
The Federal Crop Insurance Corporation experiences large losses
more years than not, pegged at almost SI billion this year. On top
of this, the Congress has authorized ad hoc disaster programs
every year since 1986.
One goal of the 1980 overhaul of the crop insurance program was
to eliminate the need for ad hoc disaster programs. Clearly, this
has not occurred. Despite the fact that the Federal Government has
spent an average of SI. 7 billion, combined, for crop insurance and
ad hoc disaster pa>Tnents each year over the past 10 years, many
producers are not satisfied with either program.
(1)
Producer dissatisfaction with crop insurance is evidenced by the
fact that participation is limited; only 30 percent of the eligible
acreage is enrolled, and when they do experience crop losses, cov-
erage is often deemed to be inadequate. Ad hoc disaster payments
are unpredictable in that they require emergency appropriations
which, in turn, generally requires large regional disasters that are
subject to the political whims of the moment. Producers cannot
budget for ad hoc disaster payments, and it makes finsincial plan-
ning for them and for the lending institutions virtually impossible.
We have two programs, purportedly working side by side, to help
producers, but in many respects, they are working at cross-pur-
poses. The very existence of ad hoc disaster programs undermines
producer willingness to invest in crop insurance, and many produc-
ers all too often do not take out crop insurance because they believe
that the Federal Government will in fact bail them out by offering
free ad hoc disaster pa3mients.
I commend the administration for taking a comprehensive ap-
proach to reform. Offering one program that combines crop insur-
ance for program crops with catastrophic insurance for nonprogram
crops addresses many of the problems enumerated.
This subcommittee must now examine the details of the adminis-
tration's bill. Above all, any crop insurance proposal must be fis-
cally and actuarially sound and within our budget requirements.
Producers must be convinced of two things: One, that their out-of-
pocket costs for insurance must be commensurate with potential in-
demnities that they may earn; and second, ad hoc chsaster pro-
grams are a thing of the past.
It will be essential that Congress goes beyond merely restating
its opposition to ad hoc crop disaster programs if this reform is in
fact going to work. That was attempted in 1980 and proved fully
ineffective. Part and parcel of any effective reform will have to be
changes in the budget rules that will make ad hoc crop disaster
payments in the future exceedingly difficult to come by, rather
than simply adding them to the Federal deficit without restraint of
pay-go rules.
There are many other concerns that have been expressed to me
about the administration's proposal, ideas and thoughts about how
to implement this concept, this bill, and I will discuss them later
in the hearing.
This hearing is the first in a series I will be having on crop in-
surance. On April 5, I will be holding a field hearing in Mr. Minge's
district in Minnesota, and on April 21, I have scheduled a hearing
here in Washington with additional outside witnesses.
But I plan on being, as chairman of this subcommittee, very,
very aggressive in moving this legislation through this subcommit-
tee; and I plan on holding a markup as soon as the schedule at all
permits. I think this is a matter of extreme importance, and I do
not think it is in our best interests to allow this issue to lay over
to the 1995 farm bill debate of the next Congress,
I will continue to work with Chairman de la Garza, Ranking Mi-
nority Member Combest, and with other members of the committee
as this legislation moves to full committee.
I would like to welcome Gene Moos and Ken Ackerman to the
subcommittee today. I look forward to hearing their testimony.
I recognize the ranking minority member of this subcommittee,
a Member who has great credibility on agricultural issues in gen-
eral, on both sides of the aisle, the gentleman from Texas, Mr.
Combest.
OPENING STATEMENT OF HON. LARRY COMBEST, A
REPRESENTATIVE IN CONGRESS FROM THE STATE OF TEXAS
Mr. Combest. Thank you, Mr. Chairman.
Mr. Chairman, I believe that we have before us today the foun-
dation of a workable crop insurance program, and if we can find
the means to adopt some form of it, we should do so.
With the exception of 1987, the Congress, since 1986, has paid
out huge sums annually for disaster assistance in addition to crop
insurance indemnities. This legislation has the potential to solve
this problem. Assuming the FCIC numbers are correct, I also be-
lieve the legislation could provide incentives for producers who
have never purchased crop insurance to buy coverage at increased
levels at an affordable price. This may be the answer to the low
participation problem.
Solving these two issues would be a public policy success for Ag-
riculture. Our problems now lie in the budget process, and as be-
fore, when a catastrophic insurance program was discussed, lack of
money may be this proposal's undoing.
I know there are different opinions on how this program should
be implemented and administered in the field. As we proceed, how-
ever, I hope that all of us on the subcommittee will keep an open
mind and let the process work. I also hope that the crop insurance
industry, as well as FCIC officials, will work together toward a
common goal. American agriculture would benefit substantially.
Thank you, Mr. Chairman.
Mr. Johnson. Thank you, Mr. Combest.
The gentleman from Minnesota, Mr. Minge.
OPENING STATEMENT OF HON. DAVID MINGE, A REPRESENT-
ATIVE IN CONGRESS FROM THE STATE OF MINNESOTA
Mr. MiNGE. Thank you, Mr. Chairman. I would just like to make
a brief comment, and that is that we have had a chance, of course,
to review the outline of the proposed reforms; and I find them very
exciting. I think that this is long overdue and represents an aggres-
sive position on the part of the administration to try not only to
improve crop insurance, but also to reconcile the inherent inconsist-
ency between a good crop insurance program and an ad hoc disas-
ter program.
My experience has led me to conclude that we have a number of
inequities in the crop insurance program as it currently exists, not
the least of which is a regional inequity in that users or partici-
pants in certain parts of the country are pajdng a disproportionate
share of the cost of crop insurance, and users in other parts of the
country are being heavily subsidized both by those premiums and
also by the Federal Government.
We have additional problems in that the yield bases in parts of
the country and for several crops are very conservative, and this
has led to really an extreme level of disappointment and unhappi-
ness with many of the users of Federal crop insurance because they
find that they are not being adequately covered for the losses that
they are incurring.
An additional problem that we faced is the difficulty of farmers
who are trying to purchase higher levels of crop insurance cov-
erage; and I recognize that there are problems of high premium
costs once you receive — reach those levels, but I am hopeful that
we will be able to offer a comprehensive package that will give
farmers the opportunity to at least elect a level of coverage that
they feel is important in their operation, and decide whether or not
the cost is one that is prohibitive or not.
Finally, I would like to point out the problem that beginning
farmers face — and I know that there is an attempt to address that,
but I would like to see it sharpened up a little bit — and that is,
how do they deal with the lack of a base, period, to establish a
yield that is used to calculate the level of protection that they re-
ceive when they have not been farming? And many of these begin-
ning farmers are individuals who have extensive experience with
their family. Also many of them are people who have had good
training in our universities and technical colleges and are deter-
mined to farm using the best management practices, and from
what I have seen, many of these beginning farmers have yields
which outstrip most of their neighbors, because in fact they are cre-
ative, imaginative, hard-working young farmers, and they need and
deserve adequate levels of protection as opposed to having to use
some t5rpe of a county average which puts them at a severe dis-
advantage.
So these are but a few of the additional topics that I think go
beyond the interrelationship between crop insurance and the disas-
ter program that ought to be addressed in Federal crop insurance
reform, and I would like to personally thank you, Mr. Ackerman,
for the time that you have taken going around the country to ex-
plain the ideas that you have been considering in the Federal crop
insurance reform, because I can tell you, from my experience, that
your visit to Minnesota was very well received, and the credibility
of the Federal crop insurance program was enhanced substantially
by your taking a day out of your schedule to spend in sub-zero Min-
nesota after having spent the previous 2 weeks in a much more
hospitable climate.
Thank you.
Mr. Johnson. Thank you.
The gentleman from Nebraska, Mr. Barrett.
OPENING STATEMENT OF HON. BILL BARRETT, A REPRESENT-
ATIVE IN CONGRESS FROM THE STATE OF NEBRASKA
Mr. Barrett. Thank you, Mr. Chairman. I, too, want to com-
pliment you for holding this hearing on the administration's plan
to reform our crop insurance program; and I thank you, Mr. Moos,
and you, Mr. Ackerman, for taking the time and the trouble to
share with us as well.
At least in the last 8 years that I have paid much attention, we
have spent probably $1 billion each year on disaster payments, and
that is on top of, what, a $900 million set-aside for crop insur-
ance— in light of that spending, I am terribly concerned about the
final product, what we might be coming up with. I am hoping that
the reform plan ultimately will make certain that we can stop the
disaster payments.
I must say at this point I am a little bit skeptical, but I hope
I and the rest of the committee will maintain somewhat of an open
mind, and perhaps we can work through this thing and come up
with something that is acceptable to everyone.
Thank you very much; and thank you, Mr. Chairman.
Mr. Johnson. The gentleman from Minnesota, Mr. Penny.
OPENING STATEMENT OF HON. TIMOTHY J. PENNY, A REP-
RESENTATIVE IN CONGRESS FROM THE STATE OF MIN-
NESOTA
Mr. Penny. Thank you, Mr. Chairman.
I first of all want to commend Mr. Espy and his colleagues at the
Department of Agriculture for their strong leadership on a whole
range of issues in the last year. I am excited about their Depart-
ment reorganization effort; I am pleased with the attention they
seem to be devoting to restructuring the foreign ag service and re-
lated issues; and here is another example where they are ahead of
the curve.
Not that we shouldn't have done something about crop insurance
reform many years ago, but to be only 12 months into this adminis-
tration and to have a major proposal for consideration by Congress
is something that is quite encouraging.
Frankly, in all of the years I have been here — and I am not one
to make partisan remarks, and I don't mean this in a partisan
sense — ^but I do feel that the efficacy we have seen for farmers in
the last 12 months is markedly different and better than the sort
of response that we had in all the earlier years. Because you are
out front, you aren't lagging behind.
We on this committee aren't begging you to pay attention to an
issue. More often than not, we are applauding you for being on top
of an issue. And this is just another example of where you have
t£iken charge and put a very laudable proposal on the table.
We may dicker a little about what the payment rate ought to be
for the catastrophic coverage and other details of the bill, but in
general thrust, it is a sign of — in general thrust, it is a proposal
that has a lot of merit, and in the final analysis, I think we can
move this legislation rather quickly.
I again just want to compliment you.
Mr. Johnson. Mr. Ewing.
OPENING STATEMENT OF HON. THOMAS W. EWING, A REP-
RESENTATIVE IN CONGRESS FROM THE STATE OF ILLINOIS
Mr. Ewing . Thank you, Mr. Chairman, and thank you for hold-
ing these hearings.
And to our guests, thank you for your appearance and your in-
volvement.
In the short time that I have been in Congress, Federal crop in-
surance has been an issue in my district and something that I have
been trying to work to improve, have introduced some legislation
in that regard, worked with both sides of the aisle in the Bush ad-
ministration, and now in the Clinton administration, to try and
come up with a plan that works. And I think we are making some
headway.
I think we have the basis with this legislation to do something
to help make our crop insurance program the floor or the net that
we need to protect agriculture from disasters and, hopefully, to
avoid the need for special disaster payments.
I would say that a problem we have here in Washington often
is trying to make one size fit all. American agriculture is very di-
verse; it is very different even in Illinois from one district to an-
other and from one section to another. So I think we have to look
at that and see if we can make flexibility in the program, put flexi-
bility in the program so that it will work and it will serve as many
of our agricultural producers across the Nation as possible.
In our particular area in Illinois, without bragging, we have the
best, and when you have the best farmland in the world — and I am
not bragging — then, of course, you have to have higher limits if you
are going to have protection, and that is a problem. We have pro-
ducers who would never have collected under the current pro-
grams, who aren't real interested in a program when it doesn't ben-
efit them.
So I look forward to working with you and with the chairman in
trjdng to have some input on this legislation; and hopefully, we can
get a good bill and get it signed soon.
Thank you.
Mr. Johnson. The gentleman from Minnesota, Mr. Peterson.
Mr. Peterson. Thank you, Mr. Chairman. Thank you and every-
one for their leadership. Rather than plow all the ground one more
time, I will just say, amen, let's get going and let's get it done.
Thank you.
Mr. Johnson. The gentleman from Michigan, Mr. Smith.
OPENING STATEMENT OF HON. NICK SMITH, A REPRESENTA-
TIVE IN CONGRESS FROM THE STATE OF MICHIGAN
Mr. Smith of Michigan. Mr. Chairman, thank you.
Also, Mr. Ackerman and Mr. Moos, I compliment you on your en-
ergetic work.
I would especially like to associate myself with the comments
made by the gentleman from Minnesota, Mr. Minge. I think that
we need to resist the temptation to require everybody to pay a base
premium that spreads the cost and makes it cheaper for everybody.
The more we can make premiums reflect real risks for different
areas of the country and for different farmers, the greater the
chances are that it will be well accepted and well used in agri-
culture.
I see an agricultural community in Michigan that has been reluc-
tant to buy crop insurance simply because the costs were much
greater than the ultimate benefits that most farmers have experi-
enced.
I would like to make one more comment. It is unfair that there
has to be wide spread disasters in order for a single farmer to re-
ceive benefits. A farmer can be wiped out by hail, but if the county
isn't declared a disaster that farmer doesn't get as much help. As
a freshman, I see a Congress that has changed over the years since
I was in USDA. There is less interest in the future of production
agriculture; there is probably less knowledge of how agriculture
really works. So I am concerned that pressures coming from the po-
litical system outside the Department of Agriculture put consum-
ers' interests higher than they should be in determining how to
best develop a strong future for production agriculture.
Thanks, Mr. Chairman.
Mr. Johnson. Thank you. We will proceed with our panel. We
have a one-panel hearing today, but I think it will be very valuable
to the subcommittee and to our staffs.
With us today is the Honorable Eugene Moos, who is Under Sec-
retary for International Affairs and Commodity Programs, U.S. De-
partment of Agriculture; and he is accompanied by Mr. Kenneth
Ackerman, Manager, Federal Crop Insurance Corporation of
USDA.
Welcome to you both. Your full statements are received for the
record, and you may choose to summarize or to proceed however
you wish. We welcome you to the subcommittee.
STATEMENT OF EUGENE MOOS, UNDER SECRETARY, INTER-
NATIONAL AFFAIRS AND COMMODITY PROGRAMS, U.S. DE-
PARTMENT OF AGRICULTURE, ACCOMPANIED BY KENNETH
D. ACKERMAN, MANAGER, FEDERAL CROP INSURANCE COR-
PORATION
Mr. Moos. Thank you very much, Chairman Johnson, for the op-
portunity to appear before you this morning. We want to express
our appreciation to you and to the members of this subcommittee
for their interest in this very important issue.
I am particularly impressed by the interest that is being shown
here this morning in terms of the number of your subcommittee
members who are still in town and felt it was important to be a
participant in this kind of a hearing.
Before I turn over the testimony to our Manager, Ken Ackerman,
I would like to make a couple of comments. I have a short state-
ment that I hope can be included in the record. But I want to talk
for just a second about the fact that the Department is very mis-
sion-oriented.
One of the missions, of course, is the mission that my office is
responsible for; namely, for the mission to maintain the viability of
production agriculture in this country. And that is, as I look at the
challenge in that regard, I look at the need for the necessary tools,
both the domestic policy tools as well as the international policy
tools, to accomplish that kind of a mission. We have got to main-
tain a viable agricultural economy out there across the United
States, £ind we have got to have the tools then to compete in the
world market if we are going to really take advantage of the com-
parative advantage that we have here in the United States as re-
gards our agricultural potential.
I look upon crop insurance as one of the most important tools in
terms of domestic policy. Given the huge capital requirements on
an annual basis that American farmers experience each year, we
need to do what we can to provide a basis of strong support in that
risk management.
8
So, again, I welcome the opportunity to appear here and thank
you very kindly; and I will now call on the Manager, Ken Acker-
man.
[The prepared statement of Mr. Moos appears at the conclusion
of the hearing.]
Mr. Johnson. Thank you, Mr. Moos. Now, Mr. Ackerman.
STATEMENT OF KENNETH D. ACKERMAN, MANAGER, FEDERAL
CROP INSURANCE CORPORATION, U.S. DEPARTMENT OF AG-
RICULTURE
Mr. Ackerman. Thank you, Mr. Chairman. I want to echo Under
Secretary Moos's thanks to the subcommittee for holding this hear-
ing very promptly and for moving very quickly on this proposal.
Secretary Espy transmitted legislation to Congress just a few
weeks ago, and we are already at this point in the hearings.
This is a proposal which, because of the timeframes involved and
the possibility of the thought toward implementation, really re-
quires action on a fairly quick basis; and we do very much appre-
ciate this very prompt hearing and discussion of the legislation.
As was evident from a lot of the comments by members of the
subcommittee, crop insurance is a program which, as much as any
other program in Washington, has been the subject of criticism,
discontent, and of calls for change; and those calls for change come
from almost every direction. You hear criticisms from farmers, from
taxpayers, from Congress, from Presidents, from GAG, from the In-
spector Greneral — ^you name it, and they have criticized crop insur-
ance.
To a great extent, much of the current dilemma comes from the
fact that crop insurance is caught between two major historical
forces. On the one side, the past half-dozen years we have seen an
unprecedented parade of natural disasters causing damage to agri-
culture. Beginning with the 1988 drought of the century, the 1989
drought, the 1992 hurricane of the century, the 1993 flood of the
half millenium coming the same year as a major drought in the
Southeast.
Farmers are very aware today that they need protection. Along
with the awareness of risk, we are undergoing a period of historic
budget restraint. Because the Federal Government of this country
has a historically high deficit, deficit reduction is one of the pre-
eminent domestic priorities.
Last year, as part of the reconciliation process, Agriculture was
required to make cuts of $3 billion. Presumably as the deficit re-
duction pressures continue in future years. Agriculture will con-
tinue to be front and center. So crop insurance finds itself between
these two forces of more awareness of risk and tighter budgets.
The problems were highlighted very much by the crisis last sum-
mer, the combination of a major flood or series of floods in the Mid-
west coming at the same time as a major drought in the Southeast.
These crises really exposed many of the problems in the crop insur-
ance program.
For one thing, there was the sheer magnitude of the loss. Just
to give you some impression of it, for crop year 1993 to date, the
crop insurance program has paid out $1.64 billion in claims to
farmers across the country. By comparison, in 1992, the year of
Hurricane Andrew, we paid out $920 million in claims across the
country. That is $700 million less; and the difference is the amount
of damage that occurred in American agriculture this past year.
To give you another comparison, in crop year 1988, the year of
the big drought, we paid out $1.2 billion in claims at a time when
our system was not as financially tight as it is today. That, too, is
$400 million less than we paid out for 1993, again because of the
magnitude of the damage in American agriculture last summer.
'nie kind of weaknesses that this revealed in the crop insurance
program surfaced on many levels. For instance, the fact that most
farmers did not have preventive planning coverage, something that
we have since fixed to a great extent; the fact that we had a prob-
lem with overly rigid price selections.
But the biggest problem that was made evident by the crisis last
summer is one that Chairman Johnson mentioned and that a lot
of other Members have referred to, and that is that we have devel-
oped in this country over the past several years two parallel sys-
tems operating side by side, tr3dng to address the same problem,
which is crop loss for farmers from unavoidable, natural causes.
On the one hand, you have crop insurance costing upwards to-
ward $900 million every year, a lot of money; and at the same
time, despite that investment, the Grovemment has had to step in,
Washington has had to step in with ad hoc disaster pajnnents in
8 out of the last 8 years, as the chart over here demonstrates.
What we have seen is that disaster programs are good at serving
a purpose. They have, in fact, gotten millions of Americans through
times of very severe crisis. They were a very responsible act of Cjov-
emment.
However, ad hoc disaster programs have created a very harmful
tjrpe of uncertainty, both for farmers and for taxpayers. From the
farmers' point of view, the main problem is that if you do not have
crop insurance and you are rel3dng on disaster aid, you simply
don't know at the beginning of the year what your protection is
going to be.
As you can see from the chart, some years there were large dis-
aster programs, and some years there were none at all. Some years
the formulas were different than others.
If you are a farmer and you suffer a loss and you don't have crop
insurance, you have to worry whether farmers in the rest of your
State or in 10 or 20 other States are having similar losses in order
for the political momentum for a disaster bill to move forward.
Farmers who suffered losses from Hurricane Andrew in 1992 re-
ceived disaster aid at 50 percent proration. Farmers who suffered
losses in the 1993 flood received the aid at 100 percent proration.
From the point of view of the farmer who suffered the loss, it
was no different from one year to another; he or she suffered a loss.
However, because of the number of States involved, the aid was dif-
ferent. This kind of uncertainty is simply no way to run a farm as
a business.
From the point of view of taxpayers, you have the same problem.
Ad hoc disaster aid is off-budget, emergency spending. It is voted
by Congress, signed by the President; it goes directly to the Federal
deficit. It is not subject to the same types of budget discipline rules
that govern virtually every other kind of Federal spending.
10
As a result, what we have seen is that while the average disaster
aid expenditure over the past 10 years, simple arithmetic average,
has been about $1 billion a year for crop loss, the disaster — ^the av-
erage expenditure over the past 6 years has been over $1.5 billion.
The numbers keep rising, and we are seeing a growing resistance,
both within Congress and in the public, to this continual parade of
disaster bills. Every one of them has become incrementally harder
to pass on the floor of the House and Senate.
In response to this set of problems. Secretary Espy announced 3
weeks ago a reform package which tries to correct crop insurance
from a number of directions at once. The centerpiece of the pro-
posal is the Federal Crop Insurance Reform Act of 1994 which this
committee is now considering. And the core purpose of that legisla-
tion is to resolve this conflict between crop insurance and ad hoc
disaster aid.
The way we propose to do it is to combine the two, insurance and
disaster aid, into one, single, unified on-budget program.
To do that requires two steps. On the one hand, we have to cut
off or drastically reduce the possibility of passing ad hoc disaster
bills in the future. We propose to do that by amending the Budget
Enforcement Act to make future crop disaster spending on-budget,
to take away its emergency designation. In other words, in the fu-
ture, a crop disaster bill would have to be paid for with offsetting
cuts.
We feel this is a very significant, very serious parliamentary hur-
dle against these types of bills in the future.
The second step is to protect farmers in the absence of ad hoc
disaster bills. We propose to do that by expanding the crop insur-
ance program. What we would do is to take the program somewhat
as currently structured with a number of reforms and expand it by
creating a new level of catastrophic coverage that would be made
available to all farmers of insurable crops for a processing fee. The
Government would pay the premium for this low-level coverage,
something like a rainy day fund to protect against a catastrophe,
and the farmer would pay a processing fee of $50 per crop per
county with a cap of $100 per county.
The t5T)e of coverage that this would provide would be 50 percent
of individual yield at 60 percent of price. We chose those levels in
order to provide a payment similar to what farmers would have
gotten under disaster bills over the past several years. We under-
stand that this comparison is not exact; the formulas are a little
different. In many cases, what they would get under 50/60 cata-
strophic is a little bit less than they would have gotten under dis-
aster bills at 100 percent proration; but again, who knows whether
next year there will be a disaster bill at 100 percent proration?
I direct the attention of the members of the subcommittee to a
number of charts toward the end of the testimony setting out spe-
cifically how 50/60 coverage would compare to disaster bills over
the past couple of years. The one key difference, however, is, cata-
strophic coverage is an insurance policy; it is not ad hoc. It is some-
thing certain. It is a financial asset that a farmer would have at
the beginning of the year. They can use it as collateral on a loan
from a bank. Moreover, even if no other farmer in the country suf-
fers a loss, they are guaranteed protection.
11
In order to make sure that the largest number of farmers in fact
get their hands on this coverage, we are proposing to link it to par-
ticipation in farm programs and Farmers Home Administration
loans. In other words, to get a deficiency pa5rtnent or to get a Farm-
ers Home loan, a farmer would have to acquire catastrophic cov-
erage or more.
Our projection is that this would result in participation increas-
ing from approximately 33 percent to about 80 percent, as the
aquamarine colored chart will show you. The 1993 level shows you
our current participation of about 33 percent. The total bar shows
you what we project to be the full participation in the program
based on linkage. The dark blue bar on the bottom shows what we
expect to have slowly, over time, an increase in buy-up coverage at
higher levels.
Third, in order to encourage farmers to get higher levels of cov-
erage, we are proposing to sweeten the pot at the higher levels.
The reform bill will provide targeted incentives so that a farmer
purchasing coverage at a 65 or 75 percent yield level would get an
out-of-pocket discount of about 10 to 15 percent.
In order to make delivery more convenient for farmers, given the
fact that we are looking at a linked program, we are proposing a
change in our delivery system. Currently, as you know, crop insur-
ance is delivered through private agents representing private com-
panies which are reinsured by the Federal Government. We are
proposing that the system in place to deliver buy-up coverage to re-
main the same. We think it has worked well; we think the private
sector has done a good job.
However, for catastrophic coverage, because of the very serious
workload implications, particularly in the early years, we are pro-
posing that a farmer would have a choice. They can either pur-
chase it through a private agent or through a local office of USD A.
Finsdly, for those crops that are not covered at all under crop in-
surance, we are proposing to provide a standing disaster program
structured very much like disaster programs are structured today.
We did not want to expand crop insurance into those areas where
we are not ready. We want to keep the program actuarially sound,
and so for those crops that are not currently covered, we are pro-
viding a standing disaster program with an area trigger.
Again, just for clarity, in our testimony you will notice that we
have included a list of all of the crops that are currently covered
under crop insurance. There are about 50 of them, and they cover
two pages. We have also included a list of crops that are currently
in the pipeline to be added to crop insurance over the next 2 to 4
years. The crops on these lists that are covered by crop insurance,
would be under the catastrophic coverage system. Those that are
not on the list — that are not covered by crop insurance, would be
covered by the standing disaster program. We do not want to leave
any crop totally out in the cold.
The price tag for this program is summarized by the next chart.
Basically what we are looking at is this: The cost of adding cata-
strophic coverage, plus incentives for buy-ups, plus providing the
standing disaster program will add about $1 billion a year to the
cost of crop insurance.
12
What we are trying to do conceptually is basically to rechannel
the money that the Federal Grovernment has been pa3dng for ad
hoc disaster relief over the past 10 years and rechannel it into a
crop insurance program. We feel that this is a better deal for farm-
ers because they get certainty; and we feel that it is a better deal
for taxpayers because they know in advance what their exposure
is.
That is the sum of our legislative proposal.
I want to take a brief moment, if I may, just to mention the other
two parts of our reform program for crop insursince, because I think
when you look at the legislation, it needs to be looked at in context.
The second major element is the Blueprint for Financial Sound-
ness, which is the document that is an attachment to my prepared
statement.
As Chairman Johnson mentioned earlier, one of the chief criti-
cisms of crop insurance over the years is that it chronically loses
money.
Our average loss ratio over the past — since 1981 has been $1.47.
That means that we pay out $1.47 in claims for every $1 we take
in in premiums, not counting overhead costs. Any private business
that ran numbers like that would have gone bankrupt years ago.
It is simply not an acceptable way to do business. Our feeling is
that American taxpayers will not tolerate it.
The reconciliation bill passed by Congress and signed by the
President last year requires us to improve that loss ratio to 1.1 by
the fiscal year beginning October 1995. We are committed to reach
that goal. The blueprint document spells out the steps that we are
taking to get there.
It includes items like our actual production history records pro-
gram, our nonstandard classification system designed to isolate and
Wentify high-risk farmers in high-risk areas and adjust their rates,
increased emphasis on compliance, and our new participant track-
ing system.
The third major element is an attempt by USDA and FCIC to
make this program more flexible, more responsive to farmer needs.
We hope to do that through a number of steps, including more in-
novative products, more flexibility on items like units, price selec-
tions and crop-specific issues that have come up, and also to de-
velop a better attitude toward listening to farmers and listening to
agents, listening to companies, listening to the people who are in-
volved in this program.
On this note, I would mention that in putting this program to-
gether, we spent a lot of time talking to farmers. We held meetings
with farmers across the country. Mr. Minge mentioned my day in
Minnesota with the subfreezing temperatures. I would only men-
tion that I personally am from Albany, New York, and grew up in
heavy winter weather. Every winter in Washington for a few days
in December I started to feel nostalgic for it.
I thank Congressman Minge for an opportunity to get that out
of my system early in the year.
So with that, I thank the committee for holding this hearing; and
we would be happy to answer any questions you may have.
[The prepared statement of Mr. Moos and Mr. Ackerman appears
at the conclusion of the hearing.]
13
Mr. Johnson. Thank you, Mr. Moos and Mr. Ackerman.
The chairman will try to enforce a 5-minute rule on members'
questions. We c£in come around as many times as it requires, but
that will, I think, allow everyone a more orderly way of asking
their questions.
One of the concerns that all of us have is whether there will be
a sufficient buy-up above the catastrophic coverage. If that does not
occur, it will jeopardize the viability of this entire strategy, and
there will be tremendous pressure to once again augment crop in-
surance benefits with some kind of catastrophic — or some kind of
ad hoc pajonent. It is going to be very important that people under-
st£ind the need for more than catastrophic coverage.
I wonder if you would comment on that, about whether cata-
strophic coverage is in fact adequate, and how you envision promot-
ing better coverage than that, and for people to buy better coverage
than that.
Mr. Ackerman. Mr. Chairman, I think that is a very important
question. Catastrophic coverage, the way we envision it, is basically
a replacement for a disaster payment. It is a way of replacing the
disaster programs by providing farmers with a base coverage. But
you are correct that for farmers to run their operations in a busi-
nesslike way, in most cases they would require a higher level of
coverage. And the more farmers that have higher levels of cov-
erage, the more sound the system is going to be. Also, the farmers
who buy higher levels of coverage, will be in a position to with-
stand a real disaster with some meaningful financial stability.
When we designed this program, we thought one of the most im-
portant elements was the financial incentives for buy-ups. We spe-
cifically did not want to have a program where there would be in-
centives for farmers to buy down rather than to buy up. That was
why we did not want to sweeten the pot too much at the cata-
strophic level. We thought 50-60 was enough to replace a disaster
program, but it was not so much that it would entice farmers to
get lower levels of coverage rather than higher levels of coverage.
In order to get farmers to buy up, we think that a number of
things have to happen. First of all, we feel that the subsidies at the
higher levels are essential. As we have noted in the testimony, this
will result in an out-of-pocket discount for farmers of about 10 to
15 percent.
We also think that the private sector is going to have to work
very hard to convince farmers to buy up. A good deal of public edu-
cation is going to be required to make this program work well.
We are also going to have to do a good bit of training for the
USDA county offices, so that when farmers come in to use those
offices to get catastrophic coverage, they are sensitized to the need
for higher levels.
Mr. Johnson. One of the most controversial aspects of any farm
policy decision we make is that whenever we tie it to participation
in farm programs and give it a mandatory nature — I think all of
us have an initial reaction against mandatory programs, although
in this case it is one where it may be msmdatory; but it is one of
the best buys imaginable, $50 for a crop coverage. Still, that is a
sore point with some people.
14
I wonder if you would comment about some who have suggested
that maybe there ought to be a waiver outlet that in effect a farmer
would have a choice if he so chose to release himself from buying
that catastrophic coverage, so long as he very explicitly waives not
only the crop insurance, but the ability to participate in any kind
of crop disaster program.
Mr. ACKERMAN. We feel the linkage provision is very important,
and we would have a serious concern about the waiver proposal.
The basic reason is this: Obviously, we understand that farmers,
like anyone else, do not like mandates; people don't like being told
what to do. Our main concern is that we don't want to have a situ-
ation 2 or 3 years down the road where we have gone through the
trouble and the expense of reforming crop insurance, such as put-
ting in place these parliamentary hurdles against future disaster
bills, and a crisis strikes — a flood or a drought or whatever — and
it turns out that a large number of farmers, for whatever reason,
simply have not acquired the coverage, either because they were
skeptical of a new Government program, or because the word
hadn't gotten out well enough, or because of simple inertia — ^for
whatever reason.
If you have a large number of farmers who have not acquired the
coverage, then that creates two problems. For one thing, those
farmers are unprotected, and for another, that could create the
very kind of political pressure for this new program to unravel.
Mr. Johnson. The gentleman from Texas, Mr. Combest.
Mr. Combest. Thank you, Mr. Chairman.
Mr. Ackerman, I have to get this down to where I can under-
stand this. Say I have three farms in one county. On farm A, I
have 500 acres of cotton and 500 acres of grain. On farm E, I have
500 acres of cotton; and on farm C, I have 500 acres of grain. When
I go in to sign up at the ASCS office, how do they determine how
much I owe for the catastrophic coverage? Is it per farm or per
crop?
Mr. Ackerman. It is per producer, per crop, per county.
Mr. Combest. I am the sole producer.
Mr. Ackerman. If you are the sole producer and all of these
farms are in one county?
Mr. Combest. They are.
Mr. Ackerman. Then you would pay $100.
Mr. Combest. So $50 for the cotton and $50 for the grain?
Mr. Ackerman. That is correct.
Mr. Combest. So I would have 1,000 acres of grain and 1,000
acres of cotton, even though the farms are separate — it is totally
separate entities as far as ASCS records — I would only pay for, per
crop?
Mr. Ackerman. You would pay per crop, correct.
Mr. Combest. Within the county?
Mr. Ackerman. Yes.
Mr. Combest. If I only farmed 100 acres of cotton in the entire
county, it would also be $50?
Mr. Ackerman. That is correct.
Mr. Combest. Let me back up.
On those farms, I am a sole producer and I have that question
answered, so it is per crop.
15
If I am farming within a county and I am a tenant farmer, obvi-
ously the amount coming to — or through ASCS to Federal crop in-
surance for my catastrophic premium would be the same. Would it
split at the ASCS office where I would pay my percentage and the
owner of the land would pay their percentage, based upon our
farming agreement?
Mr. ACKERMAN. I must tell you that on some of these points, that
level of detail of how it would be divided between
Mr. COMBEST. That is very understandable.
Mr. ACKERMAN. The one clarification I would make, though, is
that the $50 or $100 is not premium.
Mr. COMBEST. Sure. The terminology is important; I was just
calling it that.
In a situation, in your testimony, the next-to-the-last page; if it
doesn't surprise you, I have turned to the cotton page. In the exam-
ple on either one, actually it wouldn't matter whether it is example
one or example two in the amount; let's take example one, so we
will be talking about the same one.
The catastrophic protection, per acre, on a loss would pay that
farmer $64.55 an acre?
Mr. ACKERMAN. Correct.
Mr. CoMBEST. Tell me exactly how the price is determined to
where you are arriving at 60 percent of the price. How exactly is
that price determined?
Mr. ACKERMAN. The 60 percent price is based on the projected
market price that is picked by FCIC at the beginning of the grow-
ing season, based on projections by the World Agricultural Outlook
Board.
Mr. CoMBEST. And that is the same way it is done today?
Mr. ACKERMAN. That is correct.
Mr. COMBEST. In this example, so I don't have to figure back-
wards, would that be the 53 cents a pound in both of those exam-
ples?
Mr. ACKERMAN. Yes.
Mr. COMBEST. The deficiency pa3rment obviously would have still
been made in that example?
Mr. ACKERMAN. Yes.
Crop insurance does not have an offset with deficiency payments
like disasters.
Mr. COMBEST. I often think it was probably crop insurance that
caused our former chairman to leave the Congress and go to an-
other job. Hopefully, that won't happen to Mr. Johnson.
This subcommittee itself has been dealing with this thing for
years and years. I will say I will have to — ^Mr. Penny left, but I will
have to agree with him on a portion of what he said in his non-
partisan effort. We have been trying in this subcommittee for years
to come up with the magic word, adequate crop insurance program,
to replace disaster. And I think that the message has got to be —
I will just finish this comment, Mr. Chairman, and then come back
later.
The message has to be sent, we have to deliver the message; and
you said what we have to do is get the word out; that so many
farmers anticipate because it has happened so regularly, that there
16
is going to be a disaster program, many of them decide not to play
in the program. And we have to try to get that message out.
Our biggest problem has always been getting — having the oppor-
tunity to have credit for how much was being expended on disas-
ters and being able to put that into the crop insurance program
and come up with a chart like you did where you are going to save
$750 million; we could never get credit for that.
And as you and I discussed in the office — in my office, I think
the biggest difficulty may potentially be that; but if we can over-
come that hurdle, I feel very comfortable that we can come up with
an adequate crop insurance program that will be very attractive to
farmers and hopefully will even exceed your anticipated participa-
tion proposal and have a lot of farmers participate in that program,
particularly if we can tie that together with the fact that there
probably is not going to be a disaster payment, or that we would
work very hard against it.
I have several other things I would like to talk about, Mr. Chair-
man, I will come back the next time.
Mr. Johnson. Mr. Minge.
Mr. Minge. Thank you, Mr. Chairman.
I understand that we are going to have pajntnents under the 50/
60 formula under this program and, of course, there will simply be
a sign up fee for the payments that go out.
"NAHiat I am wondering is if you have any projections as to the
amount of money that would be paid out under this base level or
catastrophic level of coverage of Federal crop insurance as proposed
compared to the money that would be paid out as farmers insured
at the higher levels?
I am particularly interested in this because what I see is that
there are certain sections of the country where there is, say, a hur-
ricane or some other catastrophic event that results in almost total
destruction, and other parts of the country it is once in 100 years
or something that we have a level of crop loss that will exceed 50
percent, and I think there is a certain regional issue that is at
work here, and it would be important to have that on the table so
that as this moves through Congress, if there is any debate, that
can be taken into account and we don't have people coming up later
and complaining that this was not adequately addressed.
Mr. ACKERMAN. Two points. First of all, on the question of actual
projections, yes, we have those numbers and I can supply those to
you. I have them here.
Generally, what we have looked at, what we have broken down
is how much of the total budget, how much of our indemnities we
expect will be paid out under catastrophic versus under buy-ups.
As a general matter, just based on this chart showing the relative
number of farmers with buy-up versus catastrophic, we would ex-
pect over time that more would be paid out through buy-up rather
than catastrophic. So we will provide you the specific numbers for
the record, but generally that is the direction that they move.
[The information follows:]
17
Crop Insurance Reform: Estimated Indemnities by Fiscal Year,
by Coverage Level, Fiscal Years 1995-1999
1995
1996
1997 1998
Millions of Dollars
1999
95-99
Catastrophic (50/60)
351
392
378 369
363
1.853
Buy-up Coverage
1.131
1,284
1.485 1.681
1,874
7.456
Total
1.482
1.677
1,863 2.049
2.238
9.309
Crop Insurance Rerorm: Number of Participants by Fiscal Year
by Coverage Level, Fiscal Years 1995-1999
1995 1996 1997 1998 1999,
Thousands of Partidpants
Catastrophic (50/60) 357 325 299 278 261
Buy-up Coverage 312 353 387 416 441
Total 669 678 686 694 702
Note: Participant count is based on assumption that average farmer has 2.5 crops.
18
Mr. MiNGE, Do those numbers reflect the different type of crops,
different regions, where this level of disaster assistance would be
important as compared to other regions?
Mr. ACKERMAN. The numbers we put together thus far just sim-
ply on a nationwide level breakdown the amount that would go out
catastrophic versus the amount that would go out through buy-up.
We have not done a projection — it would be a very hard one to do —
about how many farmers in different parts of the country would
purchase buy-up versus those who would not.
Mr. MiNGE. I am not talking about purchasing it. What I mean
is, if the base level as a requirement for participation in Federal
farm programs of any type will have this high level, hopefully 80,
90 percent participation, and if there is something that shows ei-
ther by crop or by State what you feel the level of pay out would
be under the base of the catastrophic level, that is the type of
breakdown I am looking for, not farmer by farmer.
Mr. AcKERMAN. We could try to put something together like that,
yes.
Mr. MiNGE. I think it would be important in terms of fairness as
this moves along to address that.
Second, there have been a number of objections that have oc-
curred over the last year to the Federal crop insurance program be-
cause those farmers who have livestock operations and feed their
crop can have an effective farm program without participating in
any of the commodity programs, and they feel that the price elec-
tion that is available to them is not really adequate, and what they
have ended up with is with a program crop like com, they do not
have the target price, that is, the price that is used for the calcula-
tions but instead a price which is substantially lower, and going be-
yond that, they find that there are other penalties that they feel
are built into the system.
Does the proposal that you have presented address the inequities
that those farmers that feed their crop face as compared to those
that simply are doing cash cropping?
Mr. ACKERMAN. Not directly. We understand that there are two
particular problems that farmers who feed their crops face that
need to be addressed. One is the question of how they would fit
within the APH program, because in many cases, farmers who feed
their crops don't have sales records on which to base their actual
production history yield, and that is something that we are going
to have to work with in the APH program to correct. There are
ways that we can develop for them to get an accurate jdeld other
than the records used by farmers who sell their crops, and that is
something that we are going to have to correct.
On the question of the price election, that is an area which is
problematic throughout our program and which became very ap-
parent this year. As mentioned this year, in response to Mr. Com-
best on cotton, we pick a price election at the beginning of the
growing season and hold it throughout the year. That is the way
our program works.
This year it became very clear that that was not an adequate
way to run our program. We had situations, for instance, with the
price of wheat where we picked a price last summer of $2.80, which
was based on the projections of the World Outlook Board at that
19
time. However, given the drought — ^the flood over the summer and
the run-ups in the markets in the fall, that price became out of
date.
We have had a similar situation with com prices going up very
sharply. This is a problem that we are going to have to address
programwide. So far we have taken an initial step by approving a
private sector wraparound policy that would provide replacement
cost coverage, and there are one or two others like that in the pipe-
line. In the legislative proposal we have put before you, it contains
statutory language to allow us to fix that and provide an actual
market price on a more systematic basis.
Mr. MiNGE. Thank you.
Mr. Johnson. Mr. Ewing.
Mr. Ewing. Thank you, Mr. Chairman, I think that the adminis-
tration's plan to put more money in this program certainly eases
our ability to come up with a better plan. That was one of the prob-
lems I was having, trjdng to make a better plan with no more
money. The money that we are talking about here, basically is that
the disaster money that was for crops or was that disaster money
for roads and houses and everything else?
Mr. ACKERMAN. It is solely the disaster money for crops. It does
not include the other disaster money.
Mr. EwiNG. Very good. What would happen if there is a re-
quest— and I will just use the amount $1 billion, by the administra-
tion for the program and yet we appropriate — ^the Congress decides
to appropriate less than that amount? What happens if we have
claims? Will they be prorated?
Mr. AcKERMAN. No, they would not. Under the appropriations
rules governing this program, the money for indeuMiities comes out
of a FCIC revolving fund which is paid out of an annual mandatory
appropriation. So, no, that would not occur. You would not cut off
payments to farmers because we reached any kind of spending cap.
Mr. Ewing. Very good. I think that is an important point to
make.
I think I understand that the signup fee is an administrative-
type charge not allocated to the size of the operation.
Mr. ACKERMAN. Correct.
Mr. Ewing. Why would you do that as compared to having even
a floating signup fee for big farmers who really are getting a 50
percent coverage, maybe only by pa5dng the administrative fee?
Why wouldn't big operators pay a little more for that sign up?
Mr. ACKERMAN. Well, under the proposal, some big operators
would pay a little more if they were in more than one county be-
cause the cap is $100 per county. But as a general matter, what
we were trying to do here was to provide a form of insurance that
replaces disaster payments. As you know, you can get disaster pay-
ments without a signup fee no matter how big your farm is. It does
not have a signup fee that varies by acreage, so to the extent that
there may be an implied inequity here, it is carried over.
But we were trying to keep a differentiation between the pre-
mium which the Government would pay and a processing fee which
the farmer would pay, and generally the cost of processing is based
on the number of units or based on the number of farms, and that
$50 is designed to cover simply the cost of processing the paper. We
20
do not want to start getting into the complexity of formulas based
on the size of farms because then it would really look like you are
pajdng a premium, which you would not be.
Mr. EwiNG. One final question. When you talked about crops
that weren't covered and that they would be covered under the
standing disaster program, do we have a standing disaster program
that would apply for noncovered crops?
Mr. ACKERMAN. Yes. It is part of the legislative package to create
it and it is modeled after the current program with a number of
adjustments.
Mr. EwiNG. So we don't now have such a program? It would be
part of this program to create a new one?
Mr. ACKERMAN. That is right.
Mr, EwiNG. Thank you very much.
Mr. Johnson. Mr. Peterson.
Mr. Peterson. Thank you, Mr. Chairman. This question may be
a little off the wall, but in the last year, I think it was in some
bill last year, we got this pilot project put in that we were going
to have a look at revenue-tj^je insurance in Minnesota, North Da-
kota, and Mississippi, or do either one of you remember that?
Mr. ACKERMAN. It was report language that was put into the rec-
onciliation bill, yes.
Mr. Peterson. Is that now out the window or are you going
to
Mr. ACKERMAN. No, it is in the works. What we have done on
that particular language is that we have asked the Economic Re-
search Service to do a study on what is involved in it, and there
are a number of hurdles to doing it that are going to have to be
worked through. The idea would be to base the insurance on the
cost of production rather than the value of the crop, which is a new
idea.
There are a number of concerns about how you get the right ac-
tuarial data to know how to price it. There are some concerns of
what you do in those situations where the cost of production is, in
fact, greater than the value of the crop and how to design it, but
that is underway.
Mr. Peterson. When is that going to be completed?
Mr. Ackerman. I don't know the exact due date from ERS. I
know we had an initisd report from them where we have been re-
viewing it. Probably, we would be looking for something for 1995,
some type of pilot.
Mr. Peterson. So this hasn't set that aside, then?
Mr. Ackerman. No.
Mr. Peterson. I haven't had time to read your whole proposal
on that. I am not sure if I understand it yet, but one of the issues
that keeps coming up is who is going to decide the yields out there.
Has that been resolved? Are you going to have ASCS or the Fed-
eral crop, one or the other do it or are we going to have a system
where they both are involved? Is that addressed?
Mr. Ackerman. Under this system, the yields would be based on
the FCIC rules, and they would be actual production history yields
rather than the ASCS program yields.
Mr. Peterson. So the SCS is taken out of it, then?
21
Mr. ACKERMAN. The ASCS would be an implementer in that the
farmer could go to the ASCS or a farm service agency to get the
work done if they choose to do so, but the rules that would be fol-
lowed in determining the yields would be the FCIC actual produc-
tion history record rules.
Mr. Peterson. And if they don't have those history — I was read-
ing this. I probably don't want to go into that right now but I guess
I will have to take some more time to look at it and try to see if
I can — maybe what I am going to have to do is go down to the
ASCS and try to sign out and see how this works. In the abstract,
it is pretty hard to figure out, so
Mr. ACKERMAN. I could just tell you that, very briefly, you are
required to have 4 years of records, building to 10. If you don't
have those 4 years, you are given a program yield but at a dis-
count.
Mr. Peterson. This whole idea of getting to a 1.1 to 1 ratio. I
guess I don't understand how these actuarial computations are
made and maybe I need to sit down with somebody, but it is un-
clear to me how all that works. It has always been a mystery. Can
you explain that in 1 minute or less?
Mr. Ackerman. I can try. This one is a mystery for a good rea-
son. It is not a straightforward situation. These actuarial numbers,
1.1 or 1.4, are designed to be averages over time. A 1.1 loss ratio
means you are paying out $1.10 for each $1 you are taking in in
premiums. We are trying to get down to 1.1. What that means is
over a period of years, the program should be designed to produce
that as an average.
We would expect, for instance, in a year like 1993 with a major
flood and a major drought, our loss ratio would be 2.16 and that
is acceptable.
Mr. Peterson. But if you get to this level, aren't you, in effect,
going to raise the premiums to make this happen?
Mr. Ackerman. Yes. In order to get there, we are having to take
a number of steps. We are trying not to do all of it by raising pre-
miums, but that is one of the steps we are taking. IVemiums will
be raised in various
Mr. Peterson. Is that going to make it harder to get the people
to buy this insurance? I guess that is my concern. Do we know
what the effect of this is going to be? Have you got a model that
you can say with certainty just exactly what the outcome of this
is going to be?
Mr. Ackerman. We can never say with exact certainty what the
effect will be. There are some concerns that over the past few years
we have been raising rates and there has been some movement of
farmers from the 75 percent protection level down to 65 percent.
We are trying to raise rates moderately and not do it too quickly.
We don't want to lose our good customers. We are also trying to
get to that 1.1 loss ratio by taking a number of other steps, such
as the actual records and tracking systems and trying to isolate the
highest risk farmers, the farmers with disproportionate losses and
then adjusting their rates first. It is one of those unavoidable steps
we have to take.
Mr. Peterson. Mr. Chairman, I have to go to another meeting.
Could I just ask one related to this?
22
Mr. Johnson. Proceed, without objection.
Mr. Peterson. Mr. Durbin's idea about knocking out people who
are in an area where they have had losses 7 years out of 10 or
whoever's idea; is that in here at all? Just yes or no.
Mr. Ackerman. That is in here but in a different form.
Mr. Peterson. You are getting at that problem somehow?
Mr. Ackerman. Yes.
Mr. Peterson. I will try to figure out what it is. Thank you.
Thank you, Mr. Chairman.
Mr. Johnson. Mr. Barrett.
Mr. Barrett. Thank you, Mr. Chairman, and, Mr. Ackerman, I
appreciate your succinct answers and your grasp of the subject
matter very much.
Mr. Ackerman. Thank you.
Mr. Barrett. I believe that the reform plan does include for the
first time ever coverage being allowed for losses from floods and
other disasters which prevent the farmer from planting a crop, and
this is an interesting new idea.
Can you share with us what guidelines will be used for such cov-
erage? What is to prevent a person from taking advantage of that
particular section, that particular coverage? How do you monitor?
How do you adjust? Share with us, please.
Mr. Ackerman. To give you a general overview, this preventive
planting coverage has actually been available for a number of years
as an option but most farmers have chosen not to buy it because
it generally is not triggered very often. Last year's flood turned out
to be the situation where farmers needed it.
Basically, what it says is that if you cannot plant a crop because
of an insurable cause, like excessive rain or whatever, you would
get a pa3anent. It is a smaller pa3mnent than you would get for a
crop loss because you haven't invested as much in the crop. It is
generally about half, and it is tied to a late planting coverage, that
if you plant past the usual deadline for planting, you would get
coverage for that rather than simply being cut off.
Yes, it does raise some compliance issues. It is something we are
going to have to watch carefully. We are already having to wrestle
with some situations created by the aftermath of the flooding last
year where we know, for instance, that there are a number of
farms where the soil is still very soggy, where there is sand on the
soil from last year, and where there is still water on the soil from
last year. We are going to have to make some very close calls about
whether the insurer's cause exists within this year's insurance pe-
riod or last year's. So it is something we are going to have to watch
closely, but that is generally how it works.
Mr. Barrett. How will you know what crop that farmer was
going to plant?
Mr. Ackerman. How would we know what they are going to
plant?
Mr. Barrett. Yes.
Mr. Ackerman. Generally, we ask them. We look at their history
of planting. And a lot of these cases with preventive planting, it is
going to involve case-by-case determinations.
Mr. Barrett. There would be possibly an opportunity for exag-
geration or taking advantage of the system?
23
Mr. ACKERMAN. There is always that possibility. We do have a
compliance program in the field and they are there for a reason.
The companies have compliance programs also for the same reason.
I know it is a new program, but we have not been aware, to date,
of farmers abusing this in any systematic way, but we are watch-
ing this very closely. The biggest problems actually are going to be
some of the close questions about drenched fields and soil covered
fields and how it will apply there.
Mr. Barrett. Good. You have touched on — I think Mr. Ewing
touched on it basically — a question of noncovered crops. Why not
cover, I would like you to elaborate on this, why not cover millet,
pinto beans, that sort of thing? You mentioned a standing disaster
plan. Would you embellish just a bit, please?
Mr. ACKERMAN. Pinto beans, by the way, I think we do cover in
some situations, but
Mr. Barrett. Refried beans, whatever.
Mr. ACKERMAN. The reason we do not cover a lot of crops is our
program is an insurance program. We need to design it where we
charge a rate, a premium rate for the coverage which covers the
potential for loss, and where we are not taking on risks that we
can't measure or that are disproportionate to the costs.
Mr. Barrett. You don't have a history, then?
Mr. ACKERMAN. We don't have a history. We know that the crop
doesn't have a stable history in a particular area. Before we bring
a crop in, we study the rates. We make sure that there is enough
history, that we can set a rate that is meaningful. For some of the
newer crops or crops that are grown in very small amounts, we
have not been able to do that.
Grenerally, the crops that are hsted as being in the pipeline are
ones that we have a fairly rigorous analysis underway.
Mr. Barrett. I have had a few questions already asked from my
district in this particular area.
The plan calls for coverage on losses greater than 50 percent at
a payment rate of 60 percent. Again, the rationale, and I think Mr.
Combest touched on this, why not 80 percent? Why not 40 percent?
Would you please elaborate a bit?
Mr. ACKERMAN. Well, again the reason is that we were trying to
replicate a disaster payment. We did not want to make this essen-
tially free level of coverage so attractive that farmers would give
up their higher levels of coverage and run to it. We wanted to
make it, in fact, a replacement for disaster coverage. We were also
operating within a budget and we just had so much money avail-
able.
Mr. Barrett. My time is expired, Mr. Chairman. Thank you.
Mr. Johnson. Mr. Pomeroy.
Mr. Pomeroy. Mr. Chairman, I want to thank you for having
this hearing today, and I commend our lead witness. I have spoken
with him many times and know that he brings some really strong
incisive leadership to crop insurance reform.
Here is a threshold question, Mr. Ackerman. The plan proposed
depends upon adequate funding. At this point in the budgeting
process, the House did go along with the plan but only to the tune
of about three-quarters of the funding required and the Senate
didn't go along with it at all. It is my belief that the program does
24
not work if funded at the level the House provided for it. Do you
have a comment on that?
Mr. ACKERMAN. I think generally we would agree that we would
need the higher level. I would say that we very much appreciate
the action of the House on this because we feel that the House in
making the budget adjustment of about $700 million a year made
a very strong statement and adopted the rationale for a baseline
adjustment, which was a very historic action. There was a dis-
agreement about the number, but still the action was very impor-
tant.
The Senate, as I understand it, because of other issues that were
raised, never quite reached this issue, so I think we can character-
ize it as a neutral, which leaves open the opportunity to raise the
issue in conference between the House and Senate and hopefully
resolve it in a good way.
Mr. POMEROY. I think that that is possible. This is what worries
me — the other things that were preoccupying the Senate were re-
moving an additional $25 billion or something like that from the
President's budget. That makes the prospect of them meeting
House action to the tune of $750 million and adding an additional
$300 million or a little better than that to adequately fund this pro-
gram, I think, unlikely. Not necessarily prohibitively unlikely, but
somewhat unlikely.
This committee would have to, in my opinion, strongly object to
a proposal that went along with your ideas but only provided the
funding of $750 million as occurred in the House and as was scored
by the Congressional Budget Office.
Mr. ACKERMAN. Let me make two points. One is that, as I under-
stand the budget process, and the rules get very complicated as you
get into it, but that the baseline adjustment does not necessarily
involve increased spending. It is changing a baseline. It is recogniz-
ing money that is currently being spent in the real world, $1 billion
a year for disaster aid, and adding it to the baseline from which
spending or spending additions or cuts are calculated. So that may
provide a way for this to be resolved in conference divorced from
the larger issue of whether there will be more spending cuts.
Mr. POMEROY. I think your point is well made. In fact, the pro-
posal represents $750 million savings over 5 years.
Mr. ACKERMAN. That is correct.
Mr. POMEROY. That comes out of indemnity payments presently
received by farmers, insurance or disaster. So to obtain the greater
stability of the program you are offering, the farmers and the agri-
cultural sector is prepared to pay a price for that security. Will it
be a position of the administration that this has to be funded at
the amount requested or the program should not go forward?
Mr. ACKERMAN. I think the way I would have to answer that is
this way, we are still proposing the full baseline adjustment that
we have put forward. We feel the billion dollar adjustment is rea-
sonable, we feel it is well documented. We feel it makes sense.
When we put together this program with the costs that are in
it, we think it is a tight program. I don't see a lot of fluff in it. If
there is a lower number that we are presented with, we will go
back. We will reexamine our assumptions, we will look at our nun^-
bers, run them again, see what flexibility we can find, but at this
25
point, my impression, £ind Mr. Moos is here to back me up if need
be, is that we are still advocating the full baseline adjustment that
we have been talking about. The subsidies for higher level coverage
are very important. The 50/60 coverage is designed to serve a spe-
cific purpose of replacing disaster aid. The numbers were chosen
with care, and so our proposal at this point stands as is.
Mr. POMEROY. Thank you.
Mr. Johnson. I share the concerns expressed by Mr. Pomeroy.
The surest way to doom any reform is to grossly underfund the re-
form and then find that it simply does not work, not that the re-
form was conceptually wrong, but simply there wasn't enough fund-
ing to make it truly workable and this is something we will have
to monitor very closely and we may have some difficult decisions
to make about whether to go forward with the reform if it, in fact,
is inadequately funded at whatever level that threshold may be.
Relative again to the mechanics of the legislation before us, I
have a lot of concern expressed to me about the use of actual pro-
duction history for the 4 previous crop years, building up to 10
years and then that use the transitional jdelds or T yields if the
APH is not available when disasters have occurred over several
years in a row. In many parts of my State that is true. Or new land
is purchased or the land is in rotation, the yield coverage can be
extraordinarily low. Is there anjrthing that we can do to address
that problem?
Mr. ACKERMAN. Yes, sir. One of the provisions in our blueprint
that we have committed to publicly was in response to this very
specific concern. It is to provide a catastrophic jrield adjustment for
crop year 1995. We have heard from many parts of the country in-
volving many different crop concerns about the 4-year APH and the
effect of catastrophes on that. Obviously, the purpose of the APH
program is to provide a realistic yield projection. For a farmer com-
ing in after this past year's flood with a yield of zero, that is not
a realistic projection, and we understand, particularly for many
farmers coming in for the first time this year, they are starting out
with no records and their first year's record is a zero and they are
very much at a disadvantage.
We understand in other parts of the country, for inst£mce, cotton
in the South has been hit several years recently very hard. We are
very much committed to trying to address that. I don't want to
overbill it. A catastrophic yield adjustment will not get everyone to
as high of a yield as they would want to be, but it is a way of at
least trying to soften this provision to make sure that it is work-
able.
Mr. Johnson. Will you elaborate just a bit on the expense reim-
bursement formula? How much are insurance agents going to re-
ceive for their catastrophic as well as for their buy-up coverage and
how that expense mechanism works?
Mr. AcKERMAN. Currently, under the program, the insurance
companies receive a subsidy for their administrative expenses set
at an industrywide percentage. This year it is 31 percent of the
premium. That money goes to the companies to reimburse them for
their administrative costs.
Under the new program, for catastrophic coverage, there would
not be a premium — ^there would not be an expense reimbursement.
26
Rather, the farmer would pay a processing fee of $50 or $100. That
$50 or $100 would go to either the company, if that is where the
farmer chooses to purchase it, or the ASCS or farm service agency
office. That is what there would be available at the other end.
There would also be an allowance for loss adjustment costs.
For the buy-up coverage, we would change the system from the
status quo by combining the two current subsidies, the premium
subsidy and the expense reimbursement subsidy into a single
amount, and in doing that, we would say that if one company can
deliver the product more efficiently than another company, that
they could pass along the savings to the farmer. In other words,
we would start out by giving every company that same 31 or what-
ever percent for the buy-up coverage, but then allow price competi-
tion so that savings could be passed along to the farmer.
Mr. Johnson. Would you elaborate just a bit on your belief in
the need for a dual delivery system, whether this is going to gen-
erate some large training problems at the FSA level and whether
this is a transitional or is this a permanent feature of the crop in-
surance system?
Mr. ACKERMAN. We would view this as a permanent feature. And
yes, we understand that getting this up and running does require
and involve a certain burden on us, USDA, to put this together. We
are going to have to train people in the field. We are going to have
to provide computer support. We are going to have to provide data
processing support in order to make this work.
However, when we took a look at this project from the beginning,
one of the things that stuck out right away, particularly with man-
datory linkage, is the workload involved. We are looking at going
from 33 percent participation to about 80 percent participation.
That means going from about 700,000 policies to about 1.7 million
or 1.8 million policies. That is a very big increase in workload.
It became apparent that while there are a number of States,
maybe half a dozen to a dozen, where you have 1,000 or 2,000 or
3,000 agents present, there are a lot of other States where you sim-
ply don't. To require every farmer to go to a private agent to get
this work done, particularly in the early years when we are not
sure how many private companies are going to want to get into this
business, when we are still trying to work things through, we did
not want to run the risk of disruptions in sign-ups during the early
years. So the main force driving this is a workload force.
Mr. Moos. Mr. Chairman, perhaps I could make a comment on
that point. Given certain statutory restrictions to go ahead and to
plan and to develop the implementing programs here in terms of
the merger under the Farm Service Agency, I would encourage ev-
eryone to move and to consider moving quickly on the reorganiza-
tion plan. That could complicate our ability to provide this kind of
dual service this fall.
Mr. Johnson. I think it is a point well taken. Having consumed
my allotted time, Mr. Combest.
Mr. Combest. Thank you, Mr. Chairman.
Mr. Barrett was questioning earlier about someone not telling
you exactly what they intended to plant in preventive planting. A
person would sign up for this when they came in for sign-up; isn't
that correct? They would sign up for their participation.
27
Mr. ACKERMAN. Yes.
Mr. COMBEST. So you would obviously in sign-up know where at
least those crops which required identification
Mr. ACKERMAN. That is correct.
Mr. COMBEST. Have you run the numbers on what your esti-
mated cost of the program would be versus what it is by using
ASCS proven jdelds?
Mr. ACKERMAN. You mean if we were to use ASCS 3delds instead
of individual yields?
Mr. COMBEST. Right. Proven yields, a proven yield within the
counties.
Mr. ACKERMAN. Proven yields instead of?
Mr. COMBEST. ASCS proven yields. The yields by which each
farmer in the ASCS office has their yields established.
Mr. ACKERMAN. My understanding, when we ran the numbers
last year, when we put the APH program into effect and when this
was being considered during the reconciliation bill, they were based
on ASCS program yields county by county.
Mr. CoMBEST. County-by-county average.
Mr. ACKERMAN. Right.
Mr. COMBEST. Rather than by farm.
Mr. ACKERMAN. Rather than the proven jrields by farm? I don't
think we have the data on the proven yields by farm to make that
specific comparison.
Mr. CoMBEST. One of the considerations has always been in look-
ing at the crop insurance program, I am an advocate of using ASCS
proven yields for crop insurance, and I had just wondered if you,
in fact, had happened to run those numbers. There is no reason
you necessarily would. I just wondered how much more it would
cost. I am sure it would be higher, but in an instance, let's say,
where we have got a farmer who signs up for the cotton program.
It is too wet, too dry, whatever, and preventive planting is a very
significant part of this, I think, is not able to plant, passes the
planting date, the optimum planting date, and is signed up and
would be eligible for their participation in the cotton portion of
that, goes back in and follows, they can also then pay another $50
at that time on that same acreage that had initially been intended
to be devoted to cotton and insure their replacement crop — I guess
they would have to, wouldn't they?
Mr. ACKERMAN. I think they would have to, yes.
Mr. CoMBEST. They would have to do that, OK.
You kind of addressed the workload. Having come from ASCS
years ago, that is always a concern of mine, is how much — ^they are
always very willing, as all agencies of USDA are, to take on extra
work, and yet there is a point, obviously, that they can't, and rec-
ognizing that there is an interest in moving to FSA rather than
ASCS or the other agencies, I am not telling you anything here
that I am sure you haven't thought of, but we have found in deal-
ing, for example, in Farmers Home loans and so forth, one of the
big concerns we used to have, just the burdensome paperwork, just
the stacks of it, and that has been significantly reformed. We want
to take a little credit for that just because of our persistence.
But I would think that there would be, in that you have already
got established FSA, wherever it is, that we are going to be calling
81-128 0-94-2
28
them by the time this program starts, which I hope would be very
soon; that I would think there would be a fairly simple way when
a person comes in to sign up, the other sign up work they have got
to do anyway, just simply to add this on without a tremendous
amount of additional paperwork at sign-up time, which is always
a critical time because you have everybody coming in at one time.
The workload would seem to be that it could potentially be in-
creased when one has to start making those assessments. Of
course, they have to go out and spot check an)rway during the year
with various farms, but I could see there to be a potenti£d add-on
there of work which might not normally be required in doing nor-
mal, what we consider today ASCS duties.
And just from a personnel standpoint, going into this, if there is
some kind of way, and I know we used to be able to do this and
still do in some agencies, where you can get help from other em-
ployees in certain parts of — maybe if you get hit with a pgu-ticularly
hard year in one area, you are not going to need maybe as many
people doing that in other parts, so we can sort of shift people
around and try to accommodate that.
Just that in itself and the ease with which the farmer can see
that it has worked with this program I think will also help in the
long run on the participatory side.
I hope you will keep that in mind, as you are dealing, you, Mr.
Under Secretary, probably more so in encompassing a number of
agencies, the ability to do some shifting there where we cannot be
overstafted but adequately staftied as this new program would be
starting.
Thank you, Mr. Chairman.
Mr. Johnson. Mr. Minge.
Mr. Minge. First, I would like to ask what leadtime do you need
to set up this program for the 1995 crop year?
Mr. Ackerman. What we are looking at is we would need to have
the bill signed by about the middle of the year to get this up and
running for the 1995 crop year. Even that will be very tight and
we will probably have to make some special arrangement for the
fall planted crops, because for them, sign-up dates are as early as
September or earlier. So we would probably have to make some
special provision for them even under the best of circumstances.
Mr. Minge. Would you have to have the appropriation in place
too then by the middle of the summer?
Mr. Ackerman. If we know the appropriation is coming, gen-
erally appropriation bills are somewhat later in the year, but if we
know the appropriation is coming, we should be able to go forward.
Mr. Minge. I don't think anything is known until it is done. That
is the impression of this place after 15 short months.
Is there, as a part of the proposal, the expectation that the Fed-
eral Crop Insurance Corporation will be using ASCS figures so that
we will be working off* of one set of data as opposed to two?
Mr. Ackerman. We would be working off of FCIC yield data
rather than ASCS data. It is true that over time, as ASCS and
FCIC are merged to become one single agency, that we will be get-
ting better at that. But what we would be looking at, particularly
on the yield data because that is really the most sensitive and most
work intensive is FCIC data rather than ASCS data.
29
Mr. MiNGE. I have heard many farmers talk about the moral risk
of insurance and what they see is neighbors who have taken ad-
vantage of programs, including Federal crop insurance. Is there
any active program that you have to identify either errors or fraud
in connection with Federal crop insurance, including allowing peo-
ple to report on activities that they see that are occurring in their
community?
Mr. ACKERMAN. We have a very active compliance program and
it is something that we are hoping to emphasize more as we go on.
Obviously, to expand the program to this extent, we are going to
have to police it very carefully. I believe we do have an 800 number
that farmers can call to report complaints, and we can provide that
to you.
Mr. MiNGE. I am interested in the changes that you have alluded
to with respect to the preventive planting and late planting. Would
it be correct to say that the level of benefits under late planting
would always be greater than the level of benefits for preventive
planting?
Mr. AcKERMAN. I think that is right.
Mr. MiNGE. I would like to emphasize the importance of this, es-
pecially based on your experience with the flooding last summer,
where we had farmers who had large areas that they could not
plant at all and then areas where, if they were very, very diligent
and willing to take a risk, they could go in and plant and hope to
get a crop. And as I understand it, many of those farmers felt that
they were penalized if they went in late in the year and tried to
do their very best to get a crop because they received less in the
form of coverage and ultimately benefits than those farmers who
were less aggressive and simply tried to maximize potential bene-
fits. That is one aspect of this I would like to emphasize.
The second is that several people have told me that they have
seen farmers in their township who were very diligent about cul-
tivating or spraying or taking steps necessary to try to maximize
their yields in 1993 and they, in fact, did have jdelds that maybe
only resulted in a 60 percent crop loss.
They had neighbors who said, we are banking on a disaster pro-
gram and they essentially did not practice any sound farming — ad-
here to any sound farming techniques, and again, I know we can't
micromanage what every farmer does, but I trust that there is
some sensitivity to this type of taking advantage of the system, if
you will, in the administration of the program.
Mr. AcKERMAN. Yes, sir.
Mr. MiNGE. I would like to next address the question of how we
prevent this from becoming an entitlement program that in some
years just runs away with the budget and adds to the deficit. Is
there any plan to either establish a type of reinsurance pool or oth-
erwise cover the catastrophic monumental loss that could occur if
we have, again, the flood of the century or the flood of the millen-
nium that we are facing?
Mr. ACKERMAN. This is a very interesting question we have
looked over the past couple of months. If you have a year like 1993,
even under the best planned system, there will be a large loss for
the Grovemment, and we have given some thought to the possibility
of having FCIC, the Federal Government, try to find some ways to
30
cover our risk. This came up particularly when we were talking
about replacement cost coverage, about whether we might be able
to find an element of price risk, whether there is some way for us,
the Government, to pass along that risk to the private futures or
options market perhaps through a market intermediary. There
have been some thoughts of perhaps taking our risk in toto, large
chunks of it or definable parts of it and passing it on to a commer-
cial reinsurer.
We are looking at some of those ideas. They are very new to the
Government. Very few, if any, Ciovemment agencies currently do
that. It would be a very interesting departure, but I think there is
a lot of sense to it.
Mr. MiNGE. Thank you. I see my time is up.
Mr. Johnson. Mr. Pomeroy.
Mr. Pomeroy. Mr. Ackerman, I have some questions about costs
and the implementation of the program. The nominal sign-up fee
for the catastrophic level is set at a level essentially to cover proc-
essing costs. Have you done an internal analysis as to whether the
USDA can ultimately deliver these policies for the costs or charges
assessed to the farmers?
Mr. Ackerman. We are having a number of discussions with
ASCS to talk through this very point, and those talks are still un-
derway. We feel that with the $50 or $100 processing fee, we can
work with ASCS or our partners in the Farm Service Agency to de-
liver this program. They will have to absorb, obviously, some cost,
just as in the past they have had to absorb the cost of implement-
ing ad hoc disaster bills. It wiU in fact put some strain on the orga-
nization in order to get this done, but we think it is a manageable
one and we are starting to work through it with ASCS.
Mr. Pomeroy. I ask that you very carefully assess the relation-
ship between actual cost to the agency and money received as an
assessment from the farmer, because as you have acknowledged,
the dollar amount was not fixed based on an analysis of cost.
In the event you are dramatically short, and I think you might
be, there will be a fairly substEmtiaJ dislocation of ASCS resources
and that raises a host of policy concerns that this committee would
want to discuss.
Mr. Ackerman. If I may, one of the major variables in this cal-
culation is to what extent the private sector will step in and ag-
gressively market this product. We hope that they will and we hope
that in most parts of the country, farmers given a choice and given
a reasonable marketing effort by the private sector, that the bulk
of this business will in fact go to private agents.
Mr. Pomeroy. That is my next point. The public-private partner-
ship foundation for the program is one that I applaud and think,
at its best, represents a model of how perhaps many programs
could work. On the other hand, public-private partnerships only
work where there is an opportunity for the private sector to realize
some financial return competitive to what they might resilize in
other nonpartnership ventures.
Drawing upon my experience from my old days as an insurance
regulator, I am not certain that present return to the private sector
adequately compensates for risk. I am familiar with one company
that lost last year fully one-third of their surplus. Virtually all of
31
the earnings that they accured during the preceding years, nearly
10 years in Federal crop insurance program participation, got
wiped out last year.
As you work toward your plan for the 1 to 1 actuarial goal, if in-
creased risk is laid off on the private sector while return to the pri-
vate sector is screwed down a little tighter, you will not have inter-
est in private sector participation. Where do you think you are in
trjdng to strike that delicate balance at the present time?
Mr. ACKERMAN. I think this is a very, very important point and
a very important issue that we are working with the private indus-
try on. This year, as you note, the private sector companies took
a major loss — a major underwriting loss on that because of the ca-
tastrophe in the country. Our latest numbers show that the under-
writing loss collectively of the 20-odd companies who provide crop
insurance is in the range of $82 million to $83 million, which is a
lot of money.
In addition to that, the commercial reinsurance industry, which
provides support to a lot of the private companies, is very tight be-
cause there have been a number of major losses outside of agri-
culture, such as the earthquakes in California and other similar
events. So generally the financial picture is very tight.
We are going to be going forward in the next few days with our
proposed reinsurance contract to the industry which sets out the
actual numbers, the actual rules for risk sharing and profit poten-
tial, and this is something that we are going to have to work with
the industry on. We understand that we have to provide profit po-
tential to the industry to keep them in 'the game.
Mr. Moos. Mr. Chairman.
Mr. Johnson. Yes, Mr. Moss.
Mr. Moos. I have got another commitment. Might I be excused
at this point?
Mr. Johnson. Yes, you may. I think we are coming down the
stretch. There may be a couple more questions, but certainly, Mr.
Moos, and we do very much appreciate your willingness to attend
this hearing and participate with us, and we look forward to work-
ing very, very closely with you as this complex issue is resolved.
Thank you.
Mr. Moos. I thank you and the members very much for this op-
portunity. We think we have a good workable product here and
would look forward to working with the subcommittee and perfect-
ing it. So thank you very much, and I am sorry I do have to run.
Mr. Johnson. Thank you. Ken, not yet.
Following up just briefly on the APH issue we were talking about
previously, if we were able to pass this legislation and would ade-
quately fund it and do it on the time line you recommend, would
catastrophic adjustment be available for the 1995 crop Winter
wheat planted in 1994, or is that not realistic?
Mr. ACKERMAN. No, I think that is realistic. We are looking to
have a price for the 1995 crop year, yes.
Mr. Johnson. I jdeld my time to my colleagues here. Mr. Minge.
Mr. MiNGE. I have an endless supply of questions here. It is just
a question of when to stop. I would like to ask one other question
and, that is, do we have a system built into Federal crop insurance
to address the dilemma of people attempting to farm areas that
32
simply cannot be successfully farmed due to various weather relat-
ed or other risks, and if we do, how do we avoid their being left
out of the Federal crop insurance program and as a result, begin-
ning to undermine our efforts to put disaster assistance to rest?
Mr. ACKERMAN. The answer is yes and it requires quite a lot of
careful balancing. There are a number of elements in the program
that reflect the high-risk farmland. For instance, if a certain county
is a very risky county and that shows up in annual loss ratios, then
that will affect the rates charged in that county. Also, by basing
the program more on actual individual yields, that would reflect a
farmer's individual experience if they farm very high-risk land. Fi-
nally we have the nonstandard classification system to identify
farmers with very disproportionate loss records.
Yes, you are right, that the way our program is currently struc-
tured there is a danger of pricing people out of the market and cre-
ating a group of uncovered farmers who would be needing disaster
aid. My hope is that if we put the reform package into place, the
catastrophic coverage could operate as something of a safety net,
that if you have farmers who are bumped out of the system by the
nonstandard classification system, that they would be brought back
in under catastrophic coverage. Their insured jdelds would be af-
fected but at least they would have catastrophic coverage.
Mr. MiNGE. Would the catastrophic level of coverage, in effect,
enable them to continue farming land that should not be farmed?
I will just say I have heard examples of people who don't expect
to get really much of a crop at all but they farm Federal crop insur-
ance.
Mr. ACKERMAN. They would have coverage but it would be very
low coverage. They would not be farming for very much, and the
legislation on top of that gives us the ability to limit coverage in
certain areas and precisely in response to that.
Mr. MiNGE. Thank you.
Mr. Johnson. Mr. Pomeroy.
Mr. Pomeroy. I also could go on all day but we will have an op-
portunity soon to discuss these at greater length.
The only other question I would have involves the private sector
administration of this catastrophic layer at the price of that cov-
erage, the nominal price of the coverage. Is it anticipated, for ex-
ample, in adjustment that a privately written catastrophic layer
will be adjusted privately?
Mr. ACKERMAN. Yes. There would be a separate payment for a
loss adjustment separate from the $50.
Mr. Pomeroy. So none of the $50 relates to adjustment.
Mr. ACKERMAN. Correct.
Mr. Pomeroy. That is covered elsewhere. I thought that this
would work under a very simple bare bones type of coverage that
might be provided and the actual APH formula proposed, I believe,
requires a level of administrative detail that is really tough to ac-
complish under that price. Do you have an evaluation of that?
Mr. ACKERMAN. We understand that in many cases the APH cal-
culations can be complex. But we feel that it is necessary for the
program, that it is important for the program, and with APH, it is
more fair for the farmer. They are getting a yield that more accu-
rately reflects their rates, and it is also more actuarially sound be-
33
cause every study that has been conducted on this shows that
farmers with no records tend to have a disproportionate share of
losses and that is why we have drawn a fairly strong line on this
wanting to go with APH yields. We think that it can be done.
There is a lot of experience that has been developed in the last
few years, in the private sector particularly, where APH yields
have been calculated on a regular basis. There are computer soft-
ware systems that exist to help salesmen do it. These software sys-
tems would be available to the USDA people as well as to the pri-
vate sector. We would certainly need to work with both sides in de-
veloping clearer rules if need be on what records would be ade-
quate, so we might have to work with the system a little bit to
make it go, but I think it is an important element to this.
Mr. POMEROY. The final question I have, Mr. Chairman, involves
whether there has been any focus group analysis? I know there
hasn't been any market analysis on what future purchasing trends
might be with this program. I just wonder whether there will be
a level presently purchasing at the 65 percent level and paying a
premium that will opt for the virtually free catastrophic level and
self-insure their exposure after that.
Mr. ACKERMAN. That particular question is a very hard one to
predict and we think we have built in a number of incentives for
farmers to buy up, and I think that particularly after this program
is in place for a year or two and there is, in fact, a disastrous event
in some part of the country and in fact Congress does not pass a
disaster bill, that will probably be the single event that prompts a
large number of farmers to buy up.
Mr. PoMEROY. Assuming there are some farmers left?
Mr. ACKERMAN. Yes.
Mr. Johnson. Does the gentleman from Minnesota have any con-
cluding questions at this point?
Mr. MiNGE. With an eye toward the clock, I will defer any con-
cluding comments.
Mr. Johnson. I want to thank you, Mr. Ackerman, as well as
Mr. Moos, for being with us today. I find your responses very
knowledgeable and forthcoming. This is an enormously complex
area but one that will not wait, and we appreciate your leadership
in this area.
We are, again, going to be quite aggressive in tr3dng to push this
legislation on the House side. There are some unknowns at this
point in terms of funding and other factors, but nonetheless, I
think we want to push this along quickly, so thank you for joining
us today. We will all be working very closely with you, both for-
mally and informally, as this year goes on. Thank you.
With that, the subcommittee is adjourned.
[Whereupon, at 12:30 p.m., the subcommittee was adjourned, to
reconvene subject to the call of the Chair.]
[Material submitted for inclusion in the record follows:]
34
Statement for Under Secretary Gene Moos
Before the Subcommittee on Environment,
Credit and Rural Development
House Committee on Agriculture
March 25, 1994
Good morning Chairman Johnson and Members of the
Subcommittee. Thank you very much for holding this hearing
today to review the Administration's proposed bill to reform crop
insurance. During last year's flood. President Clinton and
Secretary Espy committed themselves to reforming the way in
which the government provides producers economic assistance for
crop losses due to natural disasters. As a result of our efforts, on
March 2nd, Secretary Espy submitted to Congress a proposed bill,
the "Federal Crop Insurance Reform Act of 1994." In formulating
this proposal, we met with many of FCIC's constituent groups,
private insurers. Congress, and our most important one, farmers.
35
Page 2
The Manager of the Federal Crop Insurance Corporation,
Mr. Kenneth D. Ackerman, is here today to give you all of the
details of this proposed legislation. However, before I turn the
microphone over to him, I would like to take a moment to
emphasize the importance of this bill. We clearly have a window
of opportunity to reform the process of providing disaster assistance
and we should take advantage of it before we get embroiled in the
1995 farm bill debate or faced with another natural disaster. The
logic behind this bill is sound. Right now we have two very
expensive programs delivering crop disaster relief. This
duplication is not only upsetting to taxpayers, it is unnecessary and
costly. This bill merges the crop insurance and crop disaster
programs, into one program which will be delivered by the FCIC.
Mr. Ackerman will explain why we chose this course, but I would
like to say that our emphasis on this form of risk protection stems
from the President's belief that people need to take on a certain
measure of responsibility for their own futures. Crop insurance
enables producers to do just that, to insure their futures.
36
Page 3
In closing, I ask the Subcommittee and the Committee to deal
with this issue swiftly so USDA can implement a new program by
1995 to take care of fiiture disasters in an efficient, timely way.
The Secretary and I thank you again for your time today and look
forward to working with you on this proposed legislation.
37
STATEMENT OF
EUGENE MOOS, UNDER SECRETARY,
INTERNATIONAL AFFAIRS AND COMMODITY PROGRAMS,
UNITED STATES DEPARTMENT OF AGRICULTURE
and
KEN^NETH D. ACKERMAN
MANAGER, FEDERAL CROP INSURANCE CORPORATION,
UNITED STATES DEPARTMENT OF AGRICULTURE
BEFORE THE
SUBCOMMITTEE ON ENVIRONMENT, CREDIT, AND RURAL DEVELOPMENT
COMMITTEE ON AGRICULTURE
UNITED STATES HOUSE OF REPRESENTATIVES
March 25, 1994
We want to thank the Subcommittee for holding this hearing today on the
Administration's proposed "Federal Crop Insurance Reform Act of 1994," which was
first submitted to Congress by Secretary Espy three weeks ago. We, and particularly
Secretary Espy, greatly appreciate the Subcommittee's attention to the goal of
reforming Federal crop insurance and very much look forward to working with all
Committee members in developing a plan that will work well both for American
farmers and taxpayers.
As much as any program in Washington, Federal crop insurance has long needed
change. The discontent with this program from farmers, taxpayers, insurance industry
leaders. Congress, the President, and others, has focused on long-standing, well-
documented problems:
o Despite an annual crop insurance price-tag approaching $900 million,
Washington has had to step in with crop disaster relief payments to farmers in
eight of the last eight years. Standing alone, crop insurance, with a nationwide
participation rate of just 33 percent in 1993, simply has not provided an
adequate safety net. These off-budget crop disaster programs have cost
taxpayers an average $1 billion per year over the last decade, and more than
$1.5 billion per year over the last six years. This conflict between crop
insurance and crop disaster programs must end.
38
0 Crop insurance has chronically lost money. Since 1981, the Federal Crop
Insurance Corporation's (FCIC) insurance operations have produced an overall
"loss ratio" of about 1.47. That means that we have paid out about $1.47 in
claims for every $1.00 collected in premiums and premium subsidies, not
counting overhead costs. Any private business posting these numbers would
have gone bankrupt years ago. Taxpayers are tired of picking up the tab. The
program must be made more financially sound.
o Farmers continue to complain that Federal crop insurance does not meet their
needs. The program must be made more farmer-friendly with new products,
more flexibility, and a good attitude toward listening to customers.
Last summer's disastrous Midwest flood and Southeast drought brought the
problems of crop insurance into sharp focus for Americans across the country.
Secretary Espy and President Clinton travelled extensively in the flooded areas and
spoke directly with farmers about their problems and experiences in dealing with
Federal programs designed to assist them. Again and again, they heard concerns.
These problems ranged from lack of coverage for prevented planting, to inflexible price
elections, to uncertainty about the availability and timeliness of help. On March 2, just
four weeks ago. Secretary Espy announced a massive reform program that grew directly
from last summer's experience.
In essence, we are recommending a two-pronged program to fix Federal crop
msurance: (I) reform from the inside out - administrative steps to make the program
more financially sound and farmer-finendly, and (2) reform from the outside in - the
new "Federal Crop Insurance Reform Act of 1994."
Federal Crop Insurance Reform Act of 1994
The Federal Crop Insurance Reform Act of 1994 is the centerpiece of our reform
plan. This bill responds specifically to the central finding of our review following last
summer's experience. Ad hoc crop disaster bills over the years have been an effective
act of government for people in crisis. These relief programs have helped millions of
Amencans, farmers and non-farmers alike, survive the most difficult periods in their
lives. But the reliance on this ad hoc relief that has developed as a result of an under-
used crop insurance system, has created a level of uncertainty that is bad both for
farmers and taxpayers.
39
In fact, the repeated availability of ad hoc relief has been a disincentive for
many farmers to participate in the Federally backed crop insurance program.
In a crisis, a farmer without crop insurance, who depends on disaster relief, has
no way of knowing in advance what his or her protection will be. Farmers do not
know whether a disaster bill will be approved or, if approved, what payment level the
bill will provide. Even then, a farmer suffering loss must hope that other farmers
across the state, and in ten or twenty other states, are experiencing similar losses in
order to create the momentum for action. An examination of history reveals that victims
of local disasters often get less than those of wider disasters, even though the individual
farmers may suffer similar losses.
For example, victims of 1992's Hurricane Andrew in Florida, received aid at
50.04 percent proration while victims of this summer's Midwest flood received aid at
100 percent. Farmers with losses in states not involved in the large disasters found that
congressional decisions affecting their livelihoods were being based upon factors totally
disconnected from their circumstances.
What will happen if natural disaster strikes again next year? Farmers trying to
plan their operations in a businesslike manner simply have no way to know.
Meanwhile, taxpayers are concerned that disaster aid is exempt from the budget
discipline that controls spending in virtually every other area of government. At a time
when deficit reduction is a paramount domestic priority, the price of these emergency
programs continues to rise. The public rightly questions the point of having two
expensive programs trying to address a single recurring problem -- crop disaster aid.
Americans are generous in a crisis, but their patience has limits.
The Federal Crop Insurance Reform Act of 1994 resolves this situation by
combining crop insurance and disaster aid into a single, unified, on-budget program.
This requires two steps. First, the legislation expands the crop insurance program to
protect farmers, financially, when natural disasters ruin or damage their crops. Second,
it creates a legal barrier against future ad hoc crop disaster programs.
We view this proposal as being both a vital budget reform as well as a vital
agricultural reform.
The legislation is built upon several key pillars:
40
4
1 : Catastrophic crop insurance coverage: The Federal crop insurance program
is supplemented with a new catastrophic coverage level available to farmers of
insured crops for a nominal processing fee of $50 251 crop ^er county, up to
$100 Eer farmer ger county. The processing fee may be waived for limited
resource farmers. The idea is to make this coverage very economical and
accessible.
Policies will cover prevented planting as well as actual crop losses, and will be
based on actual individual farm yields.
This catastrophic plan will protect against yield losses greater than 50 percent
at a payment rate of 60 percent of the expected market price -- a level
comparable to disaster relief programs in recent years. The difference is this:
catastrophic coverage is an individual insurance policy, not an ad hoc relief
payment. It is a contract that a farmer can take to the bank as collateral on a
loan. Even if no other farmer in the country suffers a loss, the farmer has the
security of knowing that he or she is covered.
Under this approach, in a future agricultural crisis, farmers will know in advance
the extent of their protection and taxpayers will know in advance the limits of
their exposure.
2: Buy-Up coverage: Most producers desire higher levels of coverage than the
catastrophic plan offers to protect their farm businesses. The legislation provides
targeted subsidies for these higher insurance coverage levels. The out-of-pocket
cost for coverage at the 65 or 75 percent yield levels will fall by about 10
percent. In addition, the bill gives FCIC the authority to offer policies covering
85 percent of yield. The more farmers buy higher levels of coverage, the more
fiscally sound the system will be.
3: Linkage to farm programs: To ensure the widest participation, crop insurance
coverage at the catastrophic level or above is linked to participation in Federal
commodity price support, production adjustment, and conservation programs and
Farmers Home Administration loans. We expect that this step will result in crop
insurance participation rising from 33 percent to about 80 percent of insurable
acres.
The purpose of linkage is to guarantee that, if disaster strikes, the bulk of U.S.
farmers will be protected. We understand that farmers, like other Americans, do
not like being told what to do, this is human nature. But the linkage proposal
41
is fair and not onerous given the nominal cost of catastrophic coverage to
farmers. Farmers also gain security for the future.
4: Delivery: Farmers may choose to obtain the catastrophic coverage either
through a private reinsured company or through a USDA county office. Higher
insurance coverages remain available only from private insurers. Our goal is to
provide the most convenient and efficient means of quickly getting catastrophic
crop insurance coverage to the largest number of farmers. The private sector's
insurance sales force will have a full opportunity to compete for the catastrophic
market.
5: Industry competition: The legislation restructures premium rates to reflect both
direct premium subsidies and the expense reimbursement allowance to reinsured
companies. This provides a more realistic picture of the cost of the program
both to farmers and taxpayers. More-efficient companies will be allowed to pass
along lowered overhead costs in reduced rates charged to farmers, creating a
more competitive market environment.
6: Uninsurable crops: A standing disaster program is created for crops not
covered by crop insurance, with payments triggered by area-wide loss levels and
protection levels similar to those under the catastrophic insurance plan. This
way, no one is left out in the cold, the wet, or the dry.
7: Repeal of standing disaster assistance authority: Current authorities for
standing crop disaster relief are repealed. In the future, the expanded crop
insurance program will replace disaster bills as the Federal response to
emergencies involving widespread crop loss.
As added protection, the legislation exempts appropriations for agricultural crop
disaster assistance from designation as an "emergency" for purposes of the
Balanced Budget and Emergency Deficit Control Act of 1985, as amended. This
action essentially places future crop disaster bills on budget. They must be paid
by off-setting spending cuts, rather than being allowed to proceed as
"emergency" spending. Therefore, the primary vehicle for providing crop
disaster assistance will be the Federal crop insurance program, as its legislation
originally intended.
We project that the new program created by the Federal Crop Insurance Reform
Act of 1994 will cost about $8.1 billion for fiscal years 1995 through 1999. This
represents a five-year savings of some $750 million compared to the projected cost of
42
6
the current Federal crop insurance program plus the average annual cost of ad hoc crop
loss disaster relief programs over the past decade. Essentially, this plan takes the $1
billion that Washington now spends each year on off-budget crop disaster programs and
re-channels it into a more-disciplined, on-budget insurance plan.
We would like to implement this new program in crop year 1995 so that its
benefits of certainty can be felt by farmers and taxpayers. This timetable is ambitious,
and will require Congress to do its part. Combining Federal crop insurance and
disaster aid will be a complicated process involving training of personnel, rewriting of
rules, and educating customers. We must do it right.
Achieving Financial Soundness
Resolving the conflict between Federal crop insurance and disaster programs is
not enough. We must, at the same time, also make Federal crop insurance more
financially sound. The old way of doing business, where Federal crop insurance lost
excessive amounts of taxpayer money year after year, is simply no longer acceptable.
The 1993 Omnibus Reconciliation Act (OBRA) requires FCIC to achieve an overall
projected loss ratio of 1.1 by the year beginning October 1995. The 1994 Agricultural
Appropriations Act mandated additional cost-saving reforms. We are committed to, at
least, meeting this loss ratio goal and obtaining actuarial soundness. American
taxpayers will accept nothing less.
As part of the March 2 reform package. Secretary Espy released the FCIC's
"Blueprint for Financial Soundness" mandated by OBRA 1993. This document outlines
the specific steps that FCIC will take to improve the program's financial soundness and
the savings we expect to result. Those steps include:
A modified-APH (actual production history) program to better tie individual
farmer's insurance coverage to their individual yield history. We will modify
this program to permit a catastrophic yield adjustment beginning in crop year
1995;
An expanded non-standard classification system (NCS) to identify those farmers
with unusually high loss histories and adjust their rates to more sound levels;
Greater emphasis on program compliance to prevent over payments based on
errors and abuses; and
43
7
Greater risk-sharing with private insurance companies.
Finally, we will work to make Federal crop insurance more farmer-friendly by
introducing new products, more flexibility, and more responsiveness to complaints and
ideas from farmers, agents, companies, and all participants in this program. Just
recently, FCIC for the first time used the authority granted under the Food, Agriculture,
Trade and Conservation Act of 1990 to back financially an innovative new insurance
product developed by the private sector. This process of partnership will continue.
The challenge of reforming Federal crop insurance is complex and difficult, but
we believe our plan is a responsible one and will be responsive to the needs of
American farmers and taxpayers. We hope that Congress will act expeditiously on the
legislation so that we may implement the new program for the 1995 crop year.
We will be pleased to answer any questions you may have.
(Attachments follow:)
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46
UNITED STATES CROP VALUE SUMMARY
INSURED CROPS
NATIONAL VALUE OF ALL CROPS $92,385,311,215
PERCENT
REPORTED
DOLLAR
OF TOTAL
CROP
ACRES
VALVE
VALUE
Com, Grain
66,950,480
18,008,691,703
19.493
Soybeans
56,498,545
11,213,520,994
12.138
Wheat
69,353,948
7,296,722,323
7.898
Cotton, Upland
11,501,930
4,884,989,171
5.288
Tobacco
732,740
2,829,953,119
3.063
Potatoes
1,363,816
2,396,315,957
2.594
Nursery, Container
2,375,462,434
2.571
Corn, Silage
6,124,202
1,954,333,349
2.115
Oranges
770,214
1,515,565,984
1.640
Apples
352,114
1,408,875,579
1.525
Peanuts
1,807,325
1,256,883,370
1.360
Sorghuna, Grain
9,086,031
1,203,379,180
1.303
Sugar Beets
1,375,468
1,125,379,300
1.218
Rice
2,812,429
1,040,085,810
1.126
Tomatoes - Fresh
137,578
924,639,769
1.001
Barley
7,505,000
906.414,000
0.981
Grapes - Processed
408,090
885,062,003
0.958
Sugarcane
723,840
813,706,190
0.881
Raisins
266,737
677.942,810
0.734
Beans, Dry
2,099,403
660,075,798
0.714
Ahnonds
413,202
639,048,900
0.692
Tomatoes - Processed
353,911
617,956,960
0.669
Grapes, Table
90,343
494,035,398
0.535
Onions
146,180
493,421,041
0.534
Peaches
117,823
482,137,001
0.522
Oats
6,015,517
412,485,275
0.446
Grapefruit
168,923
354,979,543
0.384
Lemons
59,816
347,117,610
0.376
Pears
50,031
281,428,961
0.305
Plums - Fresh
45,199
265,029,699
0.287
Sweet Corn - Fresh
191,672
256,059,591
0.277
Walnuts, English
184,837
254,412,036
0.275 ■
Sunflowers
1,854,495
247,439,110
0.268
Peppers
53,513
225,972,741
0.245
Sovember 5, 1992
Page: 1
47
UNITED STATES CROP VALUE SUMMARY
INSURED CROPS
NATIONAL VALUE OF ALL CROPS $92,385,311,215
PERCENT
REPORTED
DOrjAR
OF TOTAL
CROP
ACRES
VALUE
VALUE
Sweet Corn - Processed
476,613
213,509,890
0.231
Nectarines
25,761
158,609,100
0.172
Cranberries
27,801
152,828,500
0.165
Beans, Snap - Processed
214,640
139,856,244
0.151
Prunes
79,707
133,203,850
0.144
Peas, Green
293,750
109,804,780
0.119
Tangerines
18,922
69,225,312
0.075
Apricots
20,249
48,509,599
0.053
Peas, Dry
274,500
43,363,600
0.047
Macadamia Nuts
18,700
41,720,000
0.045
Safflo^ver
159,073
37,924,863
0.041
Eax
253.002
20,858,600
0.023
Tangelos
10,419
16,897,699
0.018
Figs
13,071
16,351,600
0.018
Beans, Lima - Processed
21,650
9,432.000
0.010
Temples
9,199
7,641,999
0.008
TOT.VL
69,969,260,345
75.736
"Nursery, Container" crops are container grown landscape plants.
Values are not available for the following insured crops: Popcorn, Hybrid Seed Com, Hybrid Seed
Sorghum.
Acreage data is incomplete for apples, peaches, pears and plums.
.Sovembcr 5, 1992
Page: 2
48
CROP EXPANSION
FEASIBILITY STUDY LIST
Feasibility studies are currently underway on the
following crops in anticipation of developing new
crop programs:
AVOCADOS
ASPARAGUS
BLUEBERRIES
BROCCOLI
CANOLA
CANTALOUPE
CARROTS
CAULIFLOWER
CELERY
CHERRIES-SWEET
HAY-ALL
HAY-HAYLAGE
HAY-OTHER
LETTUCE-HEAD
LETTUCE-LEAF
MUSHROOMS
NURSERY CROPS
PECANS
PEPPERMINT
PINEAPPLE
PISTACHIOS
SEED-FORAGE
SEED-LAWN
STRAWBERRIES
SWEET POTATOES
WATERMELON
49
.Participation Under the Reform Proposal
(with linkage)
1995 1996 1997
Crop year
Buy up coverage (X/X Basic coverage
Under the reform proposal, producers who participate in price support and
income support programs or who have loans under any program of the Farmers
Home Administration are required to obtain at least the catastrophic level of
1 insurance for aR crops of economic significance farmed in the county in which
that producer has an interest. The linkage with commodity programs will ensure
that participation in the crop insurance program is 80 percent of eligible acreage
in 1595.
Requiring producers to obtain catastrophic crop insurance for program crops only
would potentially lower the crop insurance participation rate as significant crops
(e.g., soybeans) would be largely unaffected. Participation rates would likely be
only as high as 65-70 percent of eUgible acreage.
IT crop insurance is not linked to commodity program eligibility it is likely
that crop insurance participation will be only 55-60 percent of eligible _
acreage, at least in the early years of program operation. Lower
p>articipation rates could encourage ad hoc disaster assistance which would
further undermine participation.
50
TARGETED SUBSroiES FOR BUY-UPS
CO^.^ARISON OF FARMER'S OUT-OF-POCKET EXPENSE
WTTH TARGETED SUBSffiY FOR BUY-UPS
Coverage
Level
Current
Cost
Cost Under
Reform Act
Difference
65% of yield
S296
S246
-17 percent
75 fo of yield
S623
S574
- 8 percent
wriHOUTTAJ<GLlKD bUl
JSIDY FOR BUY-l
JPS:
Coverage
Current
Cost Under
Level
Cost
Reform Act
Without Buy-up
Subsidy
Difference
65 fo of yield
S296
S282
- 5 percent
75% of yield
S623
S609
- 2 percent
Assumptions:
100 acres planted/ 100 bushel yield/ SI. 00 price election
10 percent premium rate for 75 percent coverage
Stated costs are the farmer's out-of-pocket cost for the coverage after deducting the
subsidy.
51
FEDEnAL CROP INSURANCE CORPORATION
PREMIUM/INDEMNITIES/LCSS RATIOS
1981 - 1993 (Crop Year Data)
(dollars in Ciousanc^s)
YEAR
PREMIUM
INDEMNITIES
LOSS RATIO
1981
S379.169
$408,101
1.08
1982
398.671
528,157
1.S2
1983
291.353
587.691
2.02
1984
435.588
639.969
1.47
19 85
439.733
684.364
1.56
1986
381.753
616.993
1.62
1987
366.640
369.163
1.01
1988
437.654
1,053.775
2.41
1989
820.763
1.215.763
1.48
19 90
838.040
1.023.581
1.23
1991
737.146
953.257
1.29
1992
758.768
920.901
1.21
1993 (ost.)
784,652
1.412,374
1.30
TOTAL 1981 - 1993
$7,069,330
$10,419,089
1.47
AVERAGE 1981-1993
SS43.841
S301.468
1.47
1992 Figures — Actuals from Oct. 27, 1993 Summary of Business
1993 Figures Irom Damage Report of Oct. 20. 1993.
CO MPT.^C LL£.\-MT,\OTUS :h-WFTE
11.'11.'93
52
CORN - PARTICIPANT
Comparison between Disaster Assistance and MPCI proposed Catastrophic Coverage
••DOES NOT INCLUDE DEnCENCY PAYMENTS RECEIVED**
Assumptions: APH yield = 1 20 bushels
ASCS Yield =100 bushels
MPCI price = $2.30/bu
ASCS target price = $2.75/bu
ASCS deficiency pymt = $0.45^u
Acres planted = 90
Farm
Per Acre
Disaster (.5004 pro-rate)
$3,952.00
$43.91
Disaster (No pro-rate)
$7,898.00
$87.76
Catastrophic Protection
$7,776.00
$86.40
53
FEDERAL CROP INSURANCE CORPORATION
CROP INSURANCE REFORM COMPARED TO DISASTER ASSISTANCE
CORN NON-PARTICIPANT
YIELD
100%
50%
REFORM
LOSS
PRORATE
PRORATE
PLAN
%
100
$ PER ACRE
80
40
86
90
67
34
69
80
54
27
52
70
41
20
35
60
27
13
17
50
18
9
0
40
0
0
0
ASSUMPTIONS:
COUNTY AVERAGE YIELD
DISASTER ASSIST. PAYMENT
APH YIELD (REFORM PLAN)
PRICE ELECTION
120 BUSHELS PER ACRE
SI. 12 PER BUSHEL
120 BUSHELS PER ACRE
$2.40 PER BUSHEL
54
FEDERAL CROP INSURANCE CORPORATION
CROP INSITRANCE REFORM COMPARED TO DISASTER ASSIST AJVCE
SOYBEANS
YIELD
100%
50%
REFORM 11
LOSS
PRORATE
PRORATE
PLAN 1
%
||
100
S PER ACRE
100
53
80
90
88
44
64
80
71
36
48
70
53
27
32
60
35
18
16
50
18
9
0
40
0
0
0
ASSUMPTIONS:
COUNTY a\t:rage yield
DISASTER ASSIST. PAYMENT
APH YIELD (REFORM PLAN)
PRICE ELECTION
45 BUSHELS PER ACRE
53.91 PER BUSHEL
45 BUSHELS PER ACRE
$5.90 PER BUSHEL
55
COTTON
Comparison between Disaster Assistance and MPCI proposed Catastrophic Coverage
EXAMPLX#1
Assximptions:
APH yield = 406 pounds
ASCS Yield = 406 pounds
MPCI price = $0.5 3 /lb
ASCS target pnce = $0.729/lb
ASCS deficiency pymt = $0. 1 86/lb
Acres planted = 92.5
Farm
Per Acre
Disaster (.5004 pro-rate)
$3,813.00
$41.22
Catastrophic Protection
$5,971.25
$64.55
Disaster (No pro-rate)
-' $7,620.00
$82.38
EXAMPLE #2
Assumptions:
APH yield = 383 pounds
ASCS Yield = 406 pounds
MPCI pnce = $0.53/lb
ASCS target pnce = $0.729/lb
ASCS deficiency pymt = $0.1 86/lb
Acres planted = 92.5
Farm
Per Acre
Disaster (.5004 pro-rate)
$3,813.00
$41.22
Catastrophic Protection
$5,633.00
$60.90
Disaster (No pro-rate)
$7,620.00
$82.38
56
COMPARISON BETWEEN CATASTROPHIC RISK PROTECTION
AND
DISASTER ASSISTANCE
WHEAT - PARTICIPANT
Bushels
Catastrophic
produced per
Risk
With .5004
With No
acre
Protection
Pro-rate
Pro-rate
0
$32.18
$19.44
$38.86
5
$22.43
$15.07
$30.11
10
$12.68
$10.69
$21.36
15
$2.93
$6.31
$12.61
20
$1.93
$3.86
25
30
WHEAT - NONPARTICIPANT
Bushels
produced per
acre
Catastrophic
Risk
Protection
With .5004
Pro-rate
With No
Pro-rate
0
$32.18
$16.61
$33.20
5
$22.43
$12.42
$24.82
10
$12.68
$8.22
$16.43
15
$2.93
$4.03
$8.05
20
25
30
ASSUMPTIONS:
33 Bushel/ Acre ASCS yield and APH yield
MPCI Market price of $3.25
Target price of $4.00
Loan price of $2.58
Flex acres calculated at 65 % of target
57
Major Points of the Blueprint for Financial Soundness
The Blueprint for Financial Soundness is a structured, comprehensive plan to achieve
a long-term projected loss ratio of 1.1 by October 1995, as directed by the Omnibus Budget
Reconciliation Act (OBRA) of 1993. FCIC is committed to achieving this goal because it is
good public policy. A financially sound program is essential to maintaining public
confidence in crop insurance. Sound management to achieve the goal will promote the long-
term stability of the program and help maintain the financial stability of American
Agriculture. The 1 . 1 loss-ratio goal recognizes that crop insurance differs from commercial
insurance because it also serves social goals, not solely the business objective of maximizing
profit.
The major initiatives outlined in the Blueprint are to:
A. Develop More Accurate Insurance Yields
B. Develop a Catastrophic Yield Adjustment
C. Implement the Group Risk Plan (GRP)
D. Implement a Data Base of Taxpayer Identification Numbers
E. Expand the Non-standard Classification System (NCS)
F. Institute Premium Rate Adjustments
G. Improve Underwriting of Crop Insurance Contracts
H. Emphasize Program Compliance
I. Assure that Adequate Risk is Borne bv the Commercial Insurance Industry
J. Improve Loss Adjustment
K. Improve Marketing
L. Expand Participation bv Introducing New Products
M. Improve Accuracy of Other Program Variables; Unit division, Program dates,
Staged guarantees, De minimus yields, Suspensions and debarment. Price
elections.
An in-depth discussion of each of these points, is contained in the Blueprint for
Financial Soundness (available from USDA/FCIC).
58
BLUEPRINT FOR FINANCIAL SOUNDNESS
SCOPE AND PURPOSE
The Omnibus Budget Reconciliation Act of 1993 (OBRA 93) contains provisions concerning
the Federal crop insurance program. These provisions direct the Federal Crop Insurance
Corporation (FCIC) to take steps necessary to improve actuarial soundness of the Federal
crop insurance program and to achieve, by the fiscal year beginning October 1, 1995, a
projected overall loss ratio not to exceed 1.10 (110 percent) (section 1501 (a)).
Projected loss ratio (dollar amount of losses paid as a percent of the total premiums
collected) is intended to be a performance standard, not an absolute ceiling for the operations
of any particular crop year. Congress recognizes that adverse weather conditions (such as
extreme drought or flood) will influence the financial results of each year's operations;
however, when good and poor years are averaged over a long period of time (such as 50 to
100 years), the expectation must be that the program will operate with an average loss ratio
of 1.10 or less. A period of time at least this long is needed to observe a range of
production conditions that are likely to be encountered by farmers. Short time periods, such
as 5 to 10 years, may encompass several favorable or unfavorable years, the frequency of
which is atypical of the longer term. This is a primary reason that the risks covered by the
Federal crop insurance program cannot be fmanced in a commercial insurance environment.
OBRA 93 directed FCIC to take the following actions to achieve this required improvement
in the loss ratio:
• Institute rules for producers to demonstrate actual production histories in establishing
yields for Federal crop insurance coverage that better reflect the associated actuarial risks.
• Establish in appropriate counties an optional "area yield" or "group risk" plan that allows
producers to qualify for an indemnity if a loss occurs in a specified area in which the
producer's farm is located.
• Create a nationwide database to track producer participation using social security account
and employer identification numbers. Such a tracking system would facilitate better
production documentation, high-risk producer identification, and assessment of insurance
providers' performance.
• Take other measures authorized by law to improve the actuarial soundness of the Federal
crop insurance program while maintaining fair and effective coverage for producers.
FCIC is committed to achieving these actions because it is good public policy. A financially
sound program is essential to maintaining public confidence in crop insurance. Sound
management to achieve these actions will promote long-term stability of the program and
1
59
facilitate the overall economic stability of the United States agricultural sector. Crop
insurance differs from commercial insurance because it serves social goals, not solely the
business objective of maximizing profit. A stable crop insurance system never developed in
the private sector without government support because of the unique and widespread risks
inherent in farming.
Section 1501 (c) (2) further directed the Department to issue for public comment a
comprehensive plan or "blueprint" that identifies, among other things:
• Steps FCIC intends to take to achieve a projected overall loss ratio of no greater than
1.10 on and after October 1, 1995.
• Additional steps if further action is required, based upon actual program experience or
unforeseen external circumstances.
• Modifications to be considered if initial actions to improve actuarial soundness work
better than anticipated.
• Projections, assumptions, and analyses which underlie the FCIC conclusions that the
above actions will achieve the required loss ratio within the stated deadline while
maintaining fairness and effective coverage to agricultural producers, and which
thereby demonstrate FCIC's compliance with the performance standard identified in
section 1501 (a).
This document proposes a draft comprehensive Blueprint for Financial Soundness, as
required by OBRA 93 for discussion and public comment. The plan has been developed with
the guidance of various persons involved with crop insurance (producers, insurers, agents,
academics, and others). The plan will be modified periodically to incorporate resulting
analyses of program performance and the recommendations of interested parties as required
by OBRA 93.
Actions identified herein result from internal analysis by FCIC and information previously
provided to FCIC by numerous interested parties. These include the Commission for the
Improvement of Crop Insurance (a Congressionally established work group in 1989 and
1990), various crop insurance industry organizations, members of Congress, agricultural
producers, crop insurance agents and insurance companies, the General Accounting Office,
and others. Information was not solicited specifically for this draft but was compiled from
previous recommendations. Not all of the specific recommendations made by any or all of
these groups are included herein. This document establishes initiatives to achieve the above
actions.
Estimates of the financial impact of an action, based on available data and professional
judgment, are provided whenever possible. Readers should recognize that these estimates are
fluid due to the nature of the data and the ever-changing program. In particular, since FCIC
81-128 0-94-3
60
does not have a single aggregate mathematical or statistical model that describes its
programs, estimates of financial impact are based on partial analysis which considers the
effect of one particular action in the absence of any other action or initiative. Also, the exact
steps to be taken under this Blueprint depend in part upon the public comment and
recommendations received before investing resources in detailed studies of potential impacts.
Readers are encouraged to provide information, rationale, and where possible, estimates of
costs or potential savings.
In some cases the financial impact of an action may not be quantified. This does not mean
the action is not important or that it cannot contribute to achievement of the goal. For
example, enhanced management reporting systems do not produce a measurable financial
impact. However, such systems can enhance FCIC's ability to estimate the potential impacts
of program changes and assure that ongoing management decisions recognize the impact of
the decision on future actions.
This document is divided into four main sections, which describe: (1) crop insurance
program to provide context and background; (2) actions FCIC proposes as part of this plan to
achieve the target loss ratio; (3) additional actions that FCIC may take if those described in
Section n are not effective or that cannot be implemented due to unforeseen circumstances;
and (4) changes FCIC will consider once the projected loss ratio achieves the targeted level
of 1.10.
I. BACKGROUND OF THE CROP INSURANCE PROGRAM
Overview of Program Operations
Crop insurance is delivered primarily by commercial insurance companies that have
entered into a cooperative financial arrangement (the Standard Reinsurance Agreement
[SRA]) with FCIC. Under this arrangement, the company agrees to deliver an FCIC
designed and priced product to eligible buyers. The company is responsible for all
aspects of customer service, and guarantees payment of the insured person's share of
the premium to FCIC. In return, FCIC reimburses the company for administrative
expenses and requires the company (on a state basis) to share in insurance experience
whether favorable or unfavorable. FCIC also provides stop loss reinsurance that
limits the maximum loss the company can sustain.
A small and decreasing portion of the total sales is managed directly by FCIC through
sales and service contractors. These contractors agree to sell an FCIC designed and
priced product and to perform certain servicing functions related to the sale (such as
determining the average yields). FCIC reimburses the contractor for administrative
expenses associated with selling and servicing the product; however, FCIC is directly
responsible for premium collection, loss adjustment, and payment of losses. These
latter functions are the responsibility of the reinsured company under that delivery
61
system. FCIC intends to eliminate direct sales after the 1994 crop year because this
system now delivers less than 10 percent of the total business, and maintaining a
nationwide capability for delivery at an acceptable cost is difficult.
The crop insurance plan for most crops indemnifies insured persons for losses in yield
exceeding a predetermined threshold amount. To establish this threshold an average
yield is determined based on the individual's production history. The first portion of
the loss (deductible of the insurance), equal to 25, 35, 50, or 65 percent of the
average yield, must be sustained by the insured person. These are the choices of
deductibles now offered by FCIC, and typically are described by the maximum loss in
yield covered by the insurance; e.g., 75 percent coverage, 65 percent, etc. The 50
and 75 percent coverage levels are required by the Act to be available to all persons.
The level of coverage is chosen by the insured individual.
The insured person also must choose a price at which the yield is valued for the
purposes of computing the amount of premium and any applicable amount of loss; this
variable is called the price election. FCIC must offer a price election that is not less
than the anticipated market price at time of harvest. This determination is made well
before the possibility of loss is known during the crop year. Otherwise, insured
persons would choose low price elections if no loss is sustained (minimizes premium
payments) the highest possible price election if a loss occurs (maximizes indemnities).
FCIC establishes premium rates for the various coverage levels, yields, crop types
and farming practices (e.g., irrigated) for each county. All planted acres of the crop
are covered by the insurance policy unless for some reason the acreage is uninsurable.
The premium owed by the insured person is determined by multiplying the average
yield per acre by the coverage level, multiplied by the number of acres planted, the
price election, and the premium rate. For example, if the average yield is 100
bushels per acre, the coverage level is 65 percent, planted acres are 50, the price
election is $2.25, and the premium rate is 5.2 percent, the premium is equal to 1(X) x
0.65 X 50 x $2.25 x 0.052, or $380.25. The potential indemnity in the event of a
total loss is $7,312.50 (determined by multiplying the average yield, coverage level,
planted acres, and price election).
A portion of the total premium is subsidized to encourage participation in the
program. The subsidy is 30 percent of the total premium for coverage levels up to
and including the 65 percent level. The subsidy for 75 percent level of coverage is
equal to the dollar junount that would be paid at the 65 percent level of coverage.
The premium subsidy for the above example would be $114.08; thus, the insured
person would pay $266.17. The same $114.08 subsidy would be paid if the insured
person chose the 75 percent coverage level.
62
In the event of a loss, the amount of production that was harvested, or that was
determined should have been harvested, is measured by the insurer. An indemnity
payment is made if the determined production is less than the total guarantee for the
acreage (yield multiplied by coverage level and acres planted). For example, if the
insured person harvests 1 ,000 bushels from 25 acres and does not harvest a potential
yield of 10 bushels per acre from the remaining 25 acres, the total of the
production to count is 1,250 bushels (1,000 bushels harvested plus 25 acres multiplied
by 10 bushels). This is subtracted from the total bushel guarantee for the acreage
(100 X 0.65 X 50, or 3,250 bushels), resulting in a loss of 2,000 bushels. The
indemnity is equal to the number of lost bushels multiplied by the price election. For
this example, the indemnity would be 2,000 bushels x $2.25, or $4,500.
Crop insurance does not guarantee revenue. As the above example illustrates, it
provides an insurance indemnity only if production is less than the established
guarantee. No protection is provided if the market price is less than the price
election.
B. Legislative Background and Issues
Federal crop insurance was established as a pUot program in the I930's. Prior to
1980, crop insurance was available only on major crops in major producing areas.
The coverage level often was limited to 60 percent or less of a long-term average
yield for an area. Congress amended the Act in 1980 to expand the scope and
coverage of the program with the intent that it be the sole means of providing public
disaster assistance to U.S. farmers. Participation in the program increased after the
1980 amendments, but remains below levels deemed necessary to be regarded as the
principal vehicle for disaster assistance. Insured acreage peaked at about 40-45
percent of the total acreage planted to insurable crops in 1988-89, but more
commonly has been in the 30-35 percent range. Losses also increased with the
expansion of the program. The loss ratio has exceeded the break-even amount of
LOO in every year since 1980. Cumulative losses for the years 1980-1992 were
approximately $2.9 billion, with a cumulative loss ratio of about 1.45 for the 13
years.
Program participation is an issue influencing the Federal crop insurance program.
Full participation (i.e., 100 percent of eligible acres insured) is the measure of
program success that is accepted (at least implicitly) by some persons. This measure
may not be the most appropriate. A rational decision to buy insurance of any kind
must be based on the magnitude of the financial difficulties that accompany a loss.
For example, buying collision coverage on a 15-year old automobile makes little
financial sense. Similarly, buying insurance on a crop that contributes only a small
portion of the expected income of the insured person may not make financial sense.
Full participation in the crop insurance program may not represent an efficient use of
the taxpayer's resources. However, participation must be high enough to minimize or
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eliminate perceived needs to legislate disaster assistance funded under dire emergency
provisions of the Budget Enforcement Act. The level of participation in the crop
insurance program that maximizes returns to the public is not known, and is an area
needing further definition.
Many losses paid in the 1980's and early 1990's were due to widespread disasters, the
adverse financial effects of which Congress intended to mitigate under the Act.
However, continuing loss ratios exceeding 100 percent, enactment of disaster
assistance in nearly every year since 1988, and lower than desirable participation
indicate that the public policy goals of the program have not been fully realized. The
Secretary of Agriculture has proposed a reform of the crop insurance program to:
• Achieve actuarial soundness.
• Increase participation to levels that render ad hoc disaster legislation
unnecessary.
• Eliminate incentives to enact ad hoc disaster assistance legislation.
The proposals contained in this Blueprint focus on these three areas that directly relate
to the goal of achieving the targeted loss ratio. They are: (1) actuarial matters such
as premium rates and yield guarantees, (2) underwriting matters such as terms and
conditions of insurance policies, and (3) management issues such as compliance and
risk-sharing arrangements with commercial insurers.
n. MANAGEMENT ACTIONS TO ACHTEVE A LOSS RATIO OF 1.10
A. Develop More Accurate Insurance Yields
The insurance yield may be the single most important factor in determining the
success or failure of the crop insurance program. A yield that is too high compared
to the productive potential of the person or land will increase the number of years that
a loss is paid. An excessively high yield also increases the amount paid when a loss
occurs. A yield that is too low will not effectively protect fanners from loss and,
because it is regarded as insufficient, will not induce desired levels of participation.
From the 1985 through 1993 crop years, insured yields were based on a program
called the Actual Production History (APH) Plan. The goal of this program was to
obtain 10 previous yields to establish the insured yield for the next crop year. Proxy
yields largely based on ASCS farm program payment yields or county averages were
allowed whenever farmers would not or could not provide 10 years of history.
Analysis by FCIC and others determined the proxy yields were benefiting farmers
whose yields tended to be lower than average and discouraging fanners whose yields
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tended to be above average. Consequently, a modified APH program that reduced the
influence of the proxy yields was introduced beginning with the 1994 crop year; thus,
a "ladder" was introduced into the proxy yields. Only 65 percent credit is given to
the proxy yield if no actual yields are reported, 80 percent credit is given if one
actual yield is reported, 90 percent if two actual yields are reported, and 100 percent
if three actual yields are reported. The proxy yields are not used after four actual
yields are available. The insured yield is a simple average of the 4 years of actual
and modified proxy yields for the first 4 years, and then (after 4 years) is the simple
average of the actual yields reported. Acquiring 10 years of production history
remains the goal of the program. These revised procedures are the core of the
initiatives to comply with the mandate of OBRA 93 to institute rules to demonstrate
actual production histories.
The revised rules are expected to substantially reduce losses of the Federal crop
insurance program. Analysis performed by FCIC indicates the new rules would
reduce losses by 15 percent for com, 22 percent for soybeans, and 18 percent for
wheat. These analyses were based on simulations of loss histories using the rules for
the two computational methods—the previous APH and the proposed modified-APH
plans. The analyses encompassed nine states each for com and soybeans and three
states for wheat. These states and crops represented nearly 60 percent of the total
premiums eamed in 1990. The results indicated that the modified-APH rules would
reduce losses by a weighted average of 19 percent and are believed to be
representative for most crops.
The actual loss ratio for the 1990 crop year was 1.23. If the modified APH rules did
reduce losses by an average of 19 percent, the loss ratio would have been 0.996.
This would achieve significant compliance with the loss ratio target of 1.10.
Based on these results, FCIC implemented modified-APH for the 1994 crop year by:
• Promulgating regulations for the program during calendar year 1994.
• Measuring the impact of the modifications upon net program losses by calculating
insured yields, premiums, and indemnities of policyholders under 1993 and 1994
rules.
• Where possible, determining whether the modified APH rules had the
intended effect of providing a more accurate offer for farmers who
previously elected not to purchase crop insurance.
• Determining whether the average number of yields reported for prior years
has changed under the modified APH rules compared with APH rules for
1990 through 1993.
65
• Implementing a tracking system to assure that insurance experience remains
associated with a person in future years (see item D below).
• Developing reporting processes to assure that the accuracy of yield
determinations is continuously monitored and improved.
• Actions requiring analysis of the effects of the modified APH rules upon the
accuracy of insured yields cannot be completed until losses from the 1994 crop year
are processed. For wheat and other fall planted crops, such availability will occur
by about the fourth calendar quarter of 1994. For spring planted crops, this does
not occur until about the middle of the first calendar quarter of 1995.
B. Catastrophic Yield Adjustment
FCIC recognizes that the average of a series of observations as short as 4 years is
subject to significant variations due to abnormally large or small yields during that time.
For example, if a major disaster year such as 1993 is included in the 4 years, the
procedure implicitly states that a similar year will occur once every 4 years. This is not
likely. Thus, FCIC will examine certain adjustments to the modified-APH rules with a
goal to assign more appropriate probabilities to the individual observations. These
adjustments commonly are called catastrophic yield adjustments. However, just as the
yields for 1 year may be abnormally low, they also may be abnormally high. Capping
the abnormally high years may also be appropriate so that average yields are not
excessively high due solely to a few observations.
FCIC will evaluate alternative methods to recognize catastrophic and unusually good
crop years, and consider implementing appropriate adjustments to the modified-APH
plan effective for the 1995 crop year.
FCIC believes that these actions to implement modified-APH will reduce the average
loss ratio over time by 10-15 percentage points (e.g., from an average of 1.40 for
several years to 1.25 to 1.30). This estimate is based on a conservative expectation of
the actual results of the simulations described above.
C. Implement Group Risk Plan
FCIC is implementing a program of insurance that is based on the average yield of an
area, not upon individual yield coverage as is offered under the traditional APH
program. The area coverage is called the Group Risk Plan (GRP) by FCIC. GRP was
introduced as a pilot program for the 1993 crop year for soybeans in 96 counties. It was
expanded for the 1994 crop year to include seven additional crops encompassing 1,872
county crop programs (one crop in one county) in 27 states. Crops now included under
GRP are barley (three states), com (17 states), cotton (seven states), forage (two
66
states), grain sorghum (four states), peanuts (four states), soybeans (24 states), and
wheat (eight states).
The GRP is intended to protect the insured person against the financial consequences of
a disaster that strikes all or nearly all fanners in an area. It sets an expected county
yield for each year based on historical yields, adjusted for any trends. Whenever the
actual county average yield for the year is less than the expected county yield by a
predetermined amount, an indemnity is paid. The principal differences of the GRP
compared to traditional individual coverage are:
• Coverage is based on a trend projected yield, which probably will exceed the
average yield of all farmers insured under individual yield coverage if there
is a positive trend in yields for the area.
• Higher coverage levels (deductibles are as low as 10 percent) at affordable premium
rates can be sold.
Thus, in the proper circumstances, GRP will offer risk protection that may be better
than the individual coverage, and may do so at a lower cost.
GRP has characteristics that make it unsuitable for managing the adverse financial
consequences of crop loss in certain circumstances. A fanner's yield each year must
change in the same direction and by about the same amount as the county yield if it is to
be fully effective coverage for the individual. For example, if the county's yield
decreases by 25 percent from the expected yield for that year, the fanner's yield also
should decline by about 25 percent from the yield he or she would have expected. In
financial market terms, the "beta" of the fanner's yields and the county yields should be
near l.(X).
Adequate data are a limitation to further significant expansion of GRP. The concept as
presently developed uses many years (30 or more) of county yields. These data are
routinely available only for counties in which the crop has been grown in commercially
significant quantities. Weather data and crop growth models may permit expansion into
counties in which the historical yield data are not available, but research is needed to
develop and test these approaches. Further, acceptance of GRP by bankers as collateral
for loans is yet to be determined.
Significant expansion of GRP is not anticipated until its contributions to agricultural risk
management can be measured. No estimates of savings can be attributed to GRP
because customer acceptance is not known. Customer acceptance of the soybean GRP
for the 1993 crop year was limited. Fewer than 500 policies (of nearly 700, 0(X) total for
the crop insurance program) were sold. Even if the plan improves the actuarial
soundness of crop insurance, the present volume of business is not sufficient to make
any noticeable difference in program results.
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D. Tmplement Pata Rase of Taxpayer Idpntifiration Number?
Amendments to the Federal Crop Insurance Act enacted in 1990 authorize FCIC to
collect and use social security numbers and employer identification numbers to
administer its programs. These regulations were appropriately approved and were
published in the Fe/leral Register in late 1992. OBRA 93 further directed FCIC to
implement a database of these numbers for certain uses not later than the 1995 crop
year.
FCIC implemented the database described above in January 1994, effective for the 1994
crop year. This database is used to locate production history that is not reported by a
person, to assure that classifications assigned under the nonstandard classification system
(NCS - see paragraph E below) are used for both the individual who accumulated the
adverse history and any person having a significant beneficial interest in a crop produced
by that person, and for other related purposes. In particular, further efforts will be
made to accumulate information about persons involved in sales and servicing of crop
insurance-agents, loss adjusters, and other insurance providers--so that their
contributions to achieving the target loss ratio can be measured.
Implementing this database will make both modified-APH and the NCS more effective
by permitting FCIC and reinsured companies to assure that all appropriate experience
and premium rating factors are used. Incremental improvement in the loss ratio due to
modified-APH and NCS is difficult to quantify. The database will enhance those
programs as weU as permit FCIC to systematically measure the performance of
insurance providers for the first time.
FCIC will also use the social security numbers and employer identification numbers for
the implementation of an Ineligible FUe Tracking System. This system will be used to
restrict (through an automated environment) producers who have been declared ineligible
to obtain benefits provided by the Federal crop insurance program. The FCIC expects
to implement the Ineligible File Tracking System beginning with the 1995 fiscal year.
E. Expand the Nonstandard Classification System (NCS)
FCIC instituted the NCS for the 1990 crop year because evidence indicated that a small
percentage of insured persons had losses in nearly every year. The losses paid to these
persons far exceeded paid premiums. For various reasons, the insured yields for these
individuals exceeded their apparent capabilities, and the premium rates were not
representative of the risks posed by these persons. NCS was intended to reduce the
insurance guarantee and increase the premium rate for such individuals. Modified- APH
eUminates the need to reduce insured yields because the insured yield will be based
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68
solely on actual yields when a person is selected for NCS. However, NCS will continue
to increase the premium rates as appropriate for those individuals who persistently have
The Agriculture, Rural Development, Food and Drug, and Related Agencies
Appropnation Act for the 1994 fiscal year prohibited FCIC from using any funds
appropnated to insure crops in certain counties unless an NCS program had been
implemented in those counties. Counties were affected if the loss ratio, after applvine
the 1993 premium rates, was greater than 1.10 more than 70 percent of the years that
the crop had been msured in that county. Approximately 2,100 county crop programs
were affected by this provision. j f f a ^
For the 1994 crop year, NCS has been extended to 11 crops encompassing over 90
percent of the total value of insurance in force. Additionally, all of the county crop
programs affected by the Appropriations language have been included under the NCS
Over 25,000 individuals (about 3.6 percent of all active policies for the 1993 crop year)
were included under this program. Not all of these persons had been insured during the
base penod. NCS also extends to persons who participated in growing the crop in some
way but who may not have been insured. These persons also are classified under NCS
so that the acreage cannot simply be insured under a different name to avoid the NCS
classification.
In 1993 FCIC commissioned a study of the NCS to determine its effectiveness. A draft
report of that study indicates that the NCS reduced the loss ratio by 5 to 10 points This
report is undergoing final preparation as this Blueprint for Financial Soundness is
finalized.
^^}^.^^ f u^^** *^ ^^ ^'°^"^ ^°' ^^ ^995 crop year. All eligible crops wiU be
included, although greater flexibility in selections may be authorized whenever program
factors that led to poor experience have been identified. NCS is not suited to certain
insured crops (e.g., Texas citrus trees) that are subject to infrequent losses of great
seventy. The additional savings from NCS are Ukely to be small in terms of the total
business because the crops that constitute the majority of premiums and losses already
are mcluded. ^
F- Institute Premium Rate Adjustments
Premium rates are essential to the success of the crop insurance program. Rates that are
too low will not produce adequate income and will lead to persistent losses. High rates
will, paradoxically, likely lead to the same outcome. Excessive premium rates
discourage participation by a broadly based cross-section of the farming community.
Instead, persons who are most likely to collect indemnities will buy, and it is not likely
that rates can be increased as rapidly as the relative risk of the pool of insured persons
increases.
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FCIC has increased premium rates for all crops in a systematic fashion beginning with
the 1991 crop year. Rates have increased as much as 70 percent for some crops in some
counties from the 1991 to the 1994 crop years. Decreases of up to 20 percent have been
made for some crops in counties with histories of low losses. By an amendment to the
Act in 1990, Congress limited general premium rate increases to 20 percent annually.
The above statistics indicate the amounts that FCIC has increased the base premium
rates. The average premium rate actually earned (actual premium paid divided by actual
liability) may not have increased by the same magnitude for various reasons. Most
importantly, insured persons may choose a lower coverage level when the rate increases.
By doing so, they accept a lesser degree of protection but also pay a lower premium
rate.
FCIC proposes to continue premium rate increases as needed to help achieve the
required loss ratio. The rate increases made during 1991-1994 have done much to
enhance the actuarial soundness of the program. However, the premium rates for some
crops and areas of the country remain below the levels needed to achieve the overall
1.10 loss ratio target.
The impact of premium rate adjustments has been evaluated by using data for the 20
years from 1973-1992. The effectiveness of the adjustments was measured by applying
the current 1993 premium rate levels to the historical period from 1973 and all
subsequent years. The loss ratios were recalculated by using the revised premium
amounts.
This method does not include any change in sales that may occur due to a higher or
lower cost of insurance. It assumes the 20-year base period is adequate to measure
actuarial performance, an assumption that may not be the most appropriate definition of
actuarial soundness. Events such as a 1993 Midwestern flood may or may not be
appropriate to include in the 20-year base period for a particular area of the country.
In 1993, seven crops (barley, com, cotton, grain sorghum, oats, soybeans, and wheat)
constituted 75 percent of total premiums. The loss ratio for 1980-1992 for these seven
crops was 1.45, identical to the loss ratio for all insured crops for this same period.
Thus, changes in premium rates for these crops should be representative of the changes
that have been made for all crops in recent years. The premium rate changes for the
seven crops through the 1994 crop year are estimated to have been adequate to reduce
the 1980-1992 loss ratio from 1.45 to 1.08. This aggregate result meets the 1.10
standard required by OBRA 93, but only two of the seven crops individually meet this
standard. Within each of these crops, many parts of the country will meet the standard
but others will not. Hence, additional rate changes in 1995 and later years are
appropriate.
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70
FCIC recognizes that premium rate increases are an important component of a viable
crop insurance program. It is also recognized that increasing premium rates to the levels
suggested by the most recent 20 year experience may not be good public policy.
Extremely high premium rates wall preclude realization of the social benefits and public
policy goals of the program because participation will be discouraged. If this happens,
experience indicates that ad hoc disaster assistance will be enacted. Such assistance is'
less likely to satisfy social objectives with regard to maintaining rural communities and
adequate supplies of food and fiber because it is uncertain for any particular year or
region of the country. Thus, a catastrophic adjustment process may be needed to temper
the influence of a year such as 1993. If the weather of 1993 truly is a 1 in 100 year
event (or, as some have suggested, a I in 500 year event), its influence should be
tempered in terms of the premium rates charged to insured persons.
In addition to changing premium rates as needed, FCIC proposes to take a number of
additional actions to enhance the accuracy and adequacy of its actuarial activities. These
include:
• Develop computer software and other tools to enhance the quality of the data used
to establish premium rates and perform actuarial analyses ("STATPLAN" database,
due for completion in October 1994)
• Plans to contract with a major actuarial consulting firm to review all aspects of
FCIC's actuarial methods (targeted to be let in 1994).
• Enhance staff skills by additional training in analytical methods for existing
personnel and more emphasis on recruitment of actuarial trainees (ongoing) for
appropriate functional units.
• Continue to contract with external specialists such as the Economic Research
Service, land grant universities, the Cooperative Extension Service, and others
(ongoing).
• Develop models to measure sources of change in premium volumes and track the
effects of premium rate changes as isolated from changes induced by factors such as
price elections, coverage level choices, insured crops, and other factors that are not
controllable by the rate-making function (development to begin immediately).
G. Improve Underwriting of Crop Insurance Contracts
Underwriting begins by establishing the basic terms and conditions of the coverage.
These include defining conditions that result in a covered loss, measuring the amount of
that loss, and defining the responsibilities of the insured and the insurer. Underwriting
continues with proper classification of an insured risk. For example, planting crop B the
year after crop A was grown on the same acreage may be riskier than if other crops
13
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were grown the previous year. Some land, such as flood plains, is more prone to
losses Quality of management also is important. A farmer who is organized, plans,
I^rforms preventive maintenance on equipment, and performs field operations m a
timely manner may minimize losses.
A comprehensive underwriting system requires effective risk "^f ^g^."^^"\^^^'^£" ^'^
2oals standards and documentation. Initiatives to improve underwnung that began in
^^ceL^^im'sZl be continued as part of the strategy detailed in this Bluepnnt. The
following specific actions will be pursued:
. Fully automate the actuarial documents to faciUtate more comprehensive
underv'riting at the point of sale and to verify the classificauon of nsk m an
automated environment (completed by the 1996 crop year).
. Develop standards and classification systems to assess and classify individual risk
including completion of research intended to develop a "sconng model for nsk that
is based on measurable attributes of a- person or situation similar to a credit rating
model (for implementation by crop year 1996 if this model is feasible).
. Continue to rewrite crop insurance policies to better describe the insurance coverage
and limitations and to reduce vulnerabilities to actuarial soundness that exist due to
imprecise, unclear, or omitted terms and conditions (ongomg. with major crops
scheduled for the 1995 crop year).
. Encourage development of supplemental or alternative insurance coverages
authorized by section 508(b) of the Act so that coverage may be improved with
most of the risk remaining in the commercial sector.
Improved underwriting will improve program performance. However meaningful
misures to quantify possible benefits are not readily available. For this reason. FCIC
camiot attribute a specific dollar amount to the benefits of improved actuanal systems
and crop insurance policies.
H. Fmphasize Program Compliance
The FCIC Compliance function is designed to confirm that the Federal crop insurance
program is opeiated and delivered as intended. Through internal reviews based on
generally accepted auditing principles, it assures that program controls are in p ace
against excess losses due to waste, fraud and abuse. Compliance emphasis will focus
on:
1 Program DeUvery. Beginning in 1987, the Compliance staff conducted reviews of
program delivery to assess compliance with regulations, policy, and procedure.
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72
That year, according to GAO and OIG audits, errors in claims payment represented
Smce that time Comphance efforts have reduced these errors to approximately
5 percent of indemmties but still need continued improvement. Losses due to claim
payment errors are not mcluded in underwriting calculations of risk so this
reduction in excess losses has a direct and immediate impact of lowering the
program loss ratio without increasing program cost or premium rates.
To further reduce claims overpayment the Compliance Staff will review the entire
operaaons of each delivery company in coordinated nationwide reviews The
review methodology was recently revised to reflect generally accepted auditing
pnnciples and statistically projectable sampling techniques.
Beginning with the 1995 crop year, Compliance requirements will be expanded to
define specific quality control and performance measurement processes for each
deliveiT company. Policy service error rates will be monitored. The performance
of each company will then be compared to an established national standard.
Program Performance. Compliance reviews for several years have shown that a
propoition of the excess losses are attributable to features in program construction
that produce unmtended results. The Compliance Staff will conduct progrT
performance reviews that assess regulations, policies and procedures designed to
prevent waste, fraud, and abuse and that the program, poUcies, and proc^ures
periorm as intended.
As ^example, in 1989 GAO claims that construction of policy language in the
?otl° Tt f. r" ^K?^"""! "^""^ '""^^^ '" approximately $20 miUion in excess
o , n nJnH H ? ^'''^^%'° ''^'^™'"« ^^"^ '""ch of FCIC losses may be attributable
to unintended features of program construction. However, recent program
performance pilot reviews of the peanut program and regional irrigated practices
resulted m an estimated 4 to 10 percent reduction in losses for those areSs that may
otherwise have gone undetected. ^
For the past several years Compliance has conducted ad hoc program reviews on
topical issues. These reviews will be expanded to identify and target reviews for
crop msurance programs with the greatest potential vulnerabiUty.
Fraud Prevention. The risk of fraud is particularly acute in the insurance industry
tstimates for property-casualty insurance indicate insurance fraud may represent as
much as 15 percent of all losses paid. Recent efforts at crop insurance fraud
detecuon and subsequent prosecution have been increasingly successful. However
atter-the-fact controls on program abuse are not fully effective. Compliance will '
work with the delivery companies to focus on practical, cost efficient fraud
prevention. Compliance operations, program performance, and complaint reviews
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73
will emphasize identifying systemic vulnerabilities and assessing program
safeguards. Discrepancies noted in review findings will be evaluated to determme
the underlying causes.
Emphasis also will be placed on measures to control program abuse that include
strict contract enforcement and pro-active policy analyses that identifies potenual
abuse and targets additional claims review. These measures will be coupled with
the aggressive implementation of civil sanctions, agent/loss adjuster debarment, and
designating producer ineligibility in findings related to program abuse.
I, A«:«nire that AHpquate Risk is Rome bv the Commprcial Insurance Industry
Amendments to the Act in 1990 directed FCIC to assure that adequate risk is borne by
the commercial insurance companies reinsured by FCIC, consistent with their ability to
bear risk and the availability of commercial reinsurance. For the 1992 reinsurance year
(a 12 month period that began on July 1, 1991 and ended on June 30, 1992), FCIC
substantially modified its Standard. Reinsurance Agreement (SRA) with the commercial
insurers which participate in the program. Both the amount and the probabiUty of losses
on the part of the commercial insurers were increased in this agreement. Additional
incremental changes in the amount of potential gains and losses were made for both the
1993 and 1994 SRA's.
The GAO suggests in a report entitled Crop Insurance Program Has Not Fostered
■Sipnificant Risk .Sharing hv In^.irance Companies (GAO/RCED 92-25, January 13,
1992) that the changes in the 1992 SRA are not significant enough in the area of nsk
bearing by the commercial insurance companies. Still, the 1992 SRA fundamentally
changed the manner in which gains and losses are calculated, a subUe but effective
measure to increase risk. The amount of potential loss increased, but the change in the
formula increased the chances that the company would lose in years of poor expenence.
As a comparison, the commercial industry lost approximately $8 million in 1988 when
the crop insurance program sustained a loss ratio of 2.45 primarily due to drought in
the Midwest. If that experience is restated to the larger 1993 premium amounts, the loss
still would have amounted to only about SlO-15 miUion. Results from the 1993 crop
year are not yet complete, but current esUmates indicate that commercial insurers will
sustain losses of $80-85 million although the loss ratio will be less than m 1988. The
difference is caused by the SRA changes.
Some will argue that industry-wide losses of $80-85 million are not significant
compared to overall program losses that may be near $900 million in 1993. Two factors
bear on this issue: (1) The ability of the insurance companies to earn reserves under the
SRA, and (2) The effect of losses upon an insurance company's operations in future
years.
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The commercial industry can bear a greater share of the losses only if there is
correspondmg opportunity to achieve comparable earnings in favorable years Over the
U wouw'mat l^'"'^- '""^^ '^''""^ a satisfactory rate of return on invested'capital. or
It would make economic sense for participants to invest in other endeavors The SRA
must allow adequate opportunity to earn this satisfactory rate of return. It 'also mus^
permit accumulation of reserves to pay losses in years Lt disasters strike Und^ tie
present SRA and the conditions of actuarial soundness of the prograi^TereVs no
opportunity to accumulate the reserves needed to bear a large'porton ^f a $9^) milUon
Losses directly impact the capital structure of the companies. An insurance comoanv
leverages Its capital (the term "surplus" is used by the industry) to suZrt the Xme of
business that it writes. As a general rule, an insurance com^ny is Stted by
regulators to bear the risk associated with $2 to $3 of premium per sTof su^lus The
muo of premiums to surplus may be lower for risky lines of insurance such Z multiple
Soit^TT.'Tf • ^"^'^'^^"^^^^^^"^"rance company loses a portion of its "^
capital, Its abihty to accept premiums in future years is reduced by a greater amount
which in turn reduces its ability to earn profits and reserves.. Thi ffcto s muTbe
the Ac? ''"'^ °' "'^ "'"'^ ^° '^ "^'^ '' ^^^-»«'> ^ i^ -rdatol by
As appropriate given the factors discussed above, FCIC wiU evaluate (1) the need to
increase nsk shanng with the commercial insurance industry as the progim achkvls
greater actuanal soundness. (2) reducing cessions to the assigned risk funTby ra.uTnng
Trovfs oTof th??^" i^r,:^ ^- -^-;^^' -- d 5 A (3) changing LZ^loss
^h^rrr^ ^- ^^ ^ecruiting additional commercial insurers to participate in
h! fooVr^K'^ ''?'""'• "^"^ ^^^Ses will be made incrementally beginning wSi
the 1995 SRA that takes effect on July 1, 1994. ^ i^cguining wim
^' Improve Loss Ad|ii«rtmpnf
Any actuarial and underwriting system can be affected by errors in adjustment of losses
The^ errors include both overpayment and underpayment of claims. Underpaymen
would not seem to be a factor influencing actuarial soundness, but failure to^ay a Is
when due wiU cause insured persons to question the value of the insurance and
potentially reduce participation. The insurance experience also will not accurately depict
the nature of the nsk insured, leading to inaccuracies in future premium rates.
Some problems in loss adjustment are directly related to deficiencies in underwriting
For example, if the crop insurance policy is not clear on a particular point, the loss
adjuster may find it necessary to make a determination in favor of the insured person.
FCIC will undertake the following initiatives to assure high quality of loss adju^ment
determmations so that results are fair to insured persons and taxpayers-
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• Develop uniform loss adjustment standards that clearly specify the requirements for
accurate determinations.
• Continue research to improve loss adjustment methods, such as yield appraisal
methods and techniques for unharvested crops, and measurement techniques for
stored production.
• Strengthen the quality adjustment provisions of crop insurance contracts and develop
standards to prevent abuse of production determinations when quality losses are
claimed.
The contributions of these factors to achieve the 1.10 target loss ratio will be measured
by a reduction in improper amounts paid on claims and a reduced error rate. The
potential impact of these actions is difficult to quantify since the initiatives to improve
underwriting also affect this area. These actions are ongoing. Loss adjustment
standards for major crops and changes to the quality adjustment provisions are targeted
for the 1995 crop year.
K. Marketing Crnp Insurance
FCIC marketing efforts for 1994 will be directed by a strategic marketing plan based on
information and data received from market research compiled across the country. The
plan's main objectives will be to inform members of the farming community about
changes in the program and to educate farmers about risk management, emphasizing the
value of crop insurance to farming operations.
FCIC will conduct a year-long media campaign targeted at publications and broadcast
markets with an agricultural audience.
Also, emphasis on outreach to minority farmers, traditionally under-represented in the
program will be coordinated through a Minority Outreach Marketing Plan that
specific^ly identifies minority farmers in each of the 10 FCIC Regional Service Offices.
L. Expand Participation hv Introducing New Products
Numerous ideas for products that will enhance the quality and acceptance of the crop
insurance program have been suggested. These include cost of production coverage
(several different concepts), dollar denominated coverage, revenue insurance,
replacement cost insurance, and others. FCIC currently has contracts with the Economic
Research Service to evaluate several alternatives in the context of public policy
contributions, availability of data to support the concepts, assessments of producer
acceptance, and other factors. FCIC proposes to continue such research and seeks
comments about additional concepts that may be appropriate. Implementation of a pilot
test of the best alternatives will be pursued.
-1^-
76
^- to£i:Qve Accrary or Other Prooram V.H.h..^
T;L:^:I^ZT^:1 tt ^-^^^^^ ''- ^^^^--^ ^- - - -^^y catego^zed und.
land in a county L is o3b; Z f ^ '"'""^'^ ^^^'^ ^^^^"" ^ """ ^^ ^1
insured crop. TOs un Zt subd v S'' h' ''"'''■ ^°' "^'^ ^'^ P^^'^ ^° ^he
payment of'additioni pre Jum Gene^w 7:^ZST "".'''°"' ^"'^^"''"^
gives them greater flexibility L ^e^^ fo esS^^iS"^ '''°^ t P^°g^ ^^^
indicates that size of a unit may a^?2rS^s« i e t, ? "" ^ ^°'"' ""^'^^
fes^ch^T^ '7T ^^^^^-^^^^c:::::^^^^:^:^ -^r
research, if venfied, suggests that a surcharge may be needed fnr^.^Iu
.n>pta„,ed. I.p,e™„.a.o„ of changes wi,, .e Cedtr .h" »96% y^.
soundness of the proSm %Tj 1T° ■*"'? ""f ''"="'>■ ^f'^" <>" =""aria]
be able to predict ETentS^foS"' T". ""/"""=' ""' "■= '"""" ^o"""
by one univers tv ndiSes S- fori, ° "^^'^ *""S ''"'=• "°™'". = study
insunmce is grS a^^ototiLT ="• i''- ""' '°'=''^' '" P^'^sing crop
encoutaged Fact do S S'^Fac'n '" ' '"","'""• ''= °^° "^
crop year by 15-30 days eit ,^ e P^ScnSs^FCIC ™''" '" "= "''
regarding other actions u.Uh r»„ ^ present dates. FCIC requests comments
of the tafgSed 1 10 TossTdo. ' ''°'^"^ '''" '''' "^" ''^'''^'^ achievement
' crTi^rSe'ha^lf 1"^'"^ ^"^^ the amount of insurance when a
approach wm rSucr^^, '?fn "J ^"^"^ ^' ''°P- ^^'"^ "^^^^^^ ^his
However k the loot nf ?J '"^emnities and help achieve actuarial soundness.
oSeitTse nee^t -^e T '°"^^ ^' '° ''^''' P^^'"'"'" ^^es from levels
otnenvise needed. The impact of staged guarantees upon customer acceptance of
19
77
crop insurance may be the valid measure of this concept. FCIC specifically
requests comments on this feature and assessments of its potential contribution to
achieving the targeted 1.10 loss ratio.
De minimus yields. This term denotes a yield below which any production is
disregarded for the purpose of determining the amount of indemnity. The concept
is advanced by interested parties as an equity issue-that it costs the farmer more to
harvest the crop than it is worth in the market. If allowed by the program,
indemnities will increase compared to the present provisions of the crop policies,
which, in turn, requires higher premium rates to achieve the goal. Readers are
encouraged to comment on the desirability of increasing premium rates by an
amount needed to permit this feature to be included in crop insurance policies.
• Suspension and debarment. Inappropriate determinations and poor administration
of the crop insurance program is alleged about agents, loss adjusters, and others
who are involved with delivery of crop insurance. The SSN/EIN database is
intended to help FCIC monitor the conduct of these persons. However, monitoring
in and of itself is insufficient if there are no penalties for violations of program
rules. FCIC proposes to develop clear and concise suspension and debarment
procedures for agents, loss adjusters, reinsured companies and others who fail to
observe the highest standards of performance in program delivery and
administration.
• Price Elections. The GAO recommended in a 1991 report that for the major crops,
FCIC set its price elections equal to the forecasts issued by the World Agricultural
Outlook Board in its semi-annual estimates. These estimates correspond to the cycle
used to prepare the annual budget of the United States Government. These
estimates are available only twice each year. Based on a sampling of a few years,
GAO stated that overall losses would be reduced if this recommendation were
adopted. FCIC is committed to offering a price election that complies fully with the
requirements of the law. In addition, the offer must be meaningful to farmers.
FCIC requests comments regarding this recommendation and assessmenu by readers
of its likelihood of contributing to reduced loss ratios and improved participation.
Readers are requested to identify additional issues that they believe are relevant and
important to assist FCIC in its actions to manage the program to achieve the target loss
ratio while maintaining or increasing participation levels.
m. MANAGEMENT ACTIONS TF SECTION n ARE NOT SUCCESSFUL
The actions identified in Section II of this document represent a major reinforcing of FCIC
efforts to achieve the important goal of financial and actuarial soundness in Federal crop
20
78
insurance. FCIC believes that successful completion of these actions will meet the objective
of achieving actuanal soundness as required by OBRA 93. Several years must elapse before
It will be possible to observe FCIC's achievement of the objective. In the interim,
attainment must be measured by realistic models of risk that adequately represent the crop
insurance program. Flexibility in managing the program to attain the objective while
simultaneously achieving other important policy objectives must be stressed.
Few options that do not adversely affect participation in a material manner are available in
the event the actions described in this blueprint are determined to be inadequate One option
IS to focus better on defining the risk that is included in the premium rates charged to current
msureds. Extreme crop disasters (such as the 1993 flooding and cold, wet growing season)
tend to be widespread and occur infrequendy. Crop insurance is not actuarially sound in a
commercial sense because the private sector cannot manage the magnitude of these risks or
arrange the financing over the long periods of time needed to accumulate reserves for a
major disaster. This characteristic of crop disasters argues that actuarial soundness perhaps
should be measured on a basis that separates normally expected conditions from the extreme
disasters. This would serve to more precisely define the risk included in the premium rates
for cunrent insureds, and the risk that should be amortized over longer time periods.
If the above is not acceptable, another action would be to limit the liabUity of crop insurance
to specific areas and crops. This limitation could take the form of complete withdrawal of
insurance in some cases, or limitations on the volume of business that would be accepted in
a year for a crop or area. Commercial insurers use this process to manage their exposure to
avoid concentrations geographically or by product line.. Crop insurance may need the same
management of its exposures rather than accepting any and all risk whenever farmers decide
to enter and exit the program. This extreme action would indicate that the program was
unable to completely fulfill its social and public policy responsibilities, and must be regarded
as an initiative of last resort.
^- MANAGEMENT ACTTONS IF ACTIONS IN SECTION U ARE MORF.
SUCCESSRH, THAN NEEDED
The greatest impediment to increased program participation will be high premium rates that
might result from the actions defined in this plan. Moderation of premium rate increases will
be a pnority if more stringent program administration reduces the loss ratio below the target.
If this occurs, experience should be examined to identify losses paid that no longer should be
expected. Once the impact of those losses is eliminated from the experience, some
improvement in premium rates would be anticipated. FCIC believes that the remaining
management actions that have improved administration of the program or that have better
defmed the coverage provided to U. S. agriculture should not be relaxed because these
generally represent good administration of public policy.
21
REVIEW OF THE ADMINISTRATION'S FED-
ERAL CROP INSURANCE REFORM PRO-
POSAL
TUESDAY, APRIL 5, 1994
House of Representatives,
Subcommittee on Environment, Credit,
AND Rural Development,
Committee on Agriculture,
Luverne, MN.
The subcommittee met, pursuant to notice, at 9:30 a.m., at the
Veterans of Foreign Wars, 705 South Highway 75, Luverne, MN,
Hon. Tim Johnson (chairman of the subcommittee) presidmg.
Present: Representatives Minge and Peterson.
Staff present: Anne Simmons.
OPENING STATEMENT OF HON. TIM JOHNSON, A REPRESENT-
ATIVE IN CONGRESS FROM THE STATE OF SOUTH DAKOTA
Mr Johnson. We will bring this field hearing of the Environ-
ment, Credit, and Rural Development Subcommittee of the House
of Representatives Committee on Agriculture to order
This is a field hearing held here at the V.F.W. Hall in Luverne,
Minnesota. It is the one and only field hearing on the issue of fed-
eral crop insurance that this committee will be holding this year
prior to holding hearings in Washington and marking up legisla-
tion on crop insurance later on in the year.
I am holding this hearing at the request of my colleague, Dave
Minge, to review the administration's comprehensive proposal, the
Federal Crop Insurance Reform Act of 1994, for the reform of our
Nation's crop insurance program. .. j
The need for reform has been apparent to me for some time and
has been dramatized as I toured the Midwest flood States this past
summer and listened to the many concerns of the producers
throughout the region.
I think there is a growing awareness among producers all across
this country that currently we have a dual system of crop insur-
ance and sometimes ad hoc disaster payments, neither of which is
working as well as it ought. It is time for us to consolidate the two
into one good risk management tool that, in fact, works, and is not
subject to the political whims of ad hoc disaster programs.
The general consensus is that the current crop insurance pro-
gram is not working as well as it should. The Federal Crop Insur-
ance Corporation experiences large losses every year, pegged at
over $1 billion this year alone.
(79)
80
On top of this, the Congress has authorized ad hoc disaster pro-
grams each and every year since 1986. One goal of the 1980 over-
haul of the crop insurance program was to eliminate the need for
ad hoc disaster programs, inasmuch as they undermine the crop in-
surance program itself.
Clearly, this has not happened, and despite the fact that the Fed-
eral Government has spent an average of $1.7 billion combined for
crop insurance and ad hoc disaster payments in each year for the
past 10 years, many producers are understandably not satisfied
with either program.
Producer dissatisfaction of the crop insurance program is evi-
denced by the fact that participation is limited. Only 30 percent of
the eligible acreage is enrolled, and when they do experience crop
loss coverage it is often inadequate.
Ad hoc disaster programs are unpredictable in that they require
emergency appropriations. They also require the right combination
of political circumstances around the country. Producers cannot
budget for ad hoc disaster programs, and it makes their financial
planning extraordinarily difficult.
We have two programs purportedly working side by side to help
producers, but in actually they are working in some respects at
cross purposes. The very existence of ad hoc disaster programs
makes the crop insurance program less effective and less attractive.
Many producers do not take out crop insurance because they be-
lieve, understandably, that the Federal Government will bail them
out by offering free ad hoc disaster payments.
I commend the Secretary of Agriculture for taking a comprehen-
sive approach to reform, offering one program that combines crop
insurance for program crops with catastrophic insurance for non-
program crops, and will help solve many of the problems enumer-
ated.
This subcommittee must now examine the details of the adminis-
tration's bill. Above all, any crop insurance proposal must be fis-
cally sound and within our budget requirements.
Producers must be convinced of two things. One, their out-of-
pocket costs for insurance must be commensurate with the poten-
tial indemnities they may earn, and second, ad hoc disaster pro-
grams are indeed a thing of the past.
There are many other concerns that have been expressed to me
about the administration proposal, and we will have an opportunity
to listen to those concerns and discuss them in this hearing.
This hearing is the second of three I've held or will be holding
on crop insurance. On March 25, this committee held a hearing in
Washington with Under Secretary of Agriculture, Gean Moos and
Ken Ackerman, Manager of the FCIC.
I have scheduled a hearing on April 21, back in Washington with
additional outside witnesses.
I plan on being as aggressive as possible in moving this legisla-
tion through this subcommittee. I plan on holding a markup as
soon as the schedules permits.
I want to thank Congressman Minge for inviting me to discuss
a topic which is of vital importance to his district. I want to wel-
come everyone in attendance. I look forward to hearing today's tes-
timony.
81
I want to add as well that the State of Minnesota is unusually
well-served relative to agriculture and rural issues by the presence
of Dave Minge who has established an excellent reputation on the
Committee of Agriculture already, and Collin Peterson who is a
proven leader in agriculture as well.
Both of them bring not only a hard work ethic to the committee,
but a degree of common sense that all too often is missing in delib-
erations in Washington. The people of Minnesota can be immensely
proud of the service that they have from both Mr. Minge and Mr.
Peterson.
I will yield for any opening statement that the more senior of my
colleagues has.
Mr. Peterson first.
OPENING STATEMENT OF HON. COLLIN C. PETERSON, A REP-
RESENTATIVE IN CONGRESS FROM THE STATE OF MIN-
NESOTA
Mr. Peterson. Thank you, Mr. Chairman. I will be brief.
I want to commend your leadership on taking hold of this issue
and moving aggressively. It is time that we do something. The tim-
ing is right. We have the administration on board for, I think, the
first time that they have really been committed. I think we have
a real opportunity to put this together. We work on it real hard,
and I understand that you are going to do that.
I held some meetings in my district yesterday to talk about the
administration's proposal. We have a lot of issues that we are going
to have to deal with as we go through this. I am sure you are hear-
ing the same sort of thing from your constituents.
I am glad to be here in spite of the fact that it snowed last night.
We didn't get any snow up North. We live right up there.
But glad to be in Luveme. The first time I've been here, and it
was beautiful flying in this morning.
Thank you.
Mr. Johnson. Mr. Minge?
OPENING STATEMENT OF HON. DAVID MINGE, A REPRESENT-
ATIVE IN CONGRESS FROM THE STATE OF MINNESOTA
Mr. Minge. Thank you, Mr. Chairman. I appreciate the willing-
ness of the committee to hold the hearing in the Midwest, and par-
ticularly to hold the hearing here in Luveme.
It provides us with an excellent opportunity to not only learn
about the proposal that is coming from Secretary of Agriculture
Espy and President CUnton with respect to crop insurance, but also
to comment on that proposal.
Altogether to often we have hearings in Washington, and it is ex-
pensive. It is difficult for people throughout the country to attend
these hearings, and there is a feeling of remoteness that Washing-
ton is making decisions without considering or understanding what
is going on in the countryside.
This is our chance here in South Dakota, Minnesota, Iowa, to
participate in the formation of legislation. The fact that this is the
only field hearing that will be held outside Washington, DC, on this
important topic this year, I think, gives added significance to our
gathering here today.
82
Many of the comments that have been made by Chairman John-
son are ones that I wish to echo. In addition, I would point out that
we have areas of consideration or concern with crop insurance that
go beyond its relation to the ad hoc disaster programs.
We have had difficulties with the lack of preventive planting cov-
erage, penalties for late planting. The policy for 1994 has been
modified to try to address those concerns.
We have had additional questions with respect to yield, with re-
spect to loss ratios in different portions of the country, and added
features of the program. These are all things I hope that we can
take some time to address this morning. In addition, I know they
will be addressed as this legislation moves through the committee.
I think it is especially significant that in attendance in Luveme
this morning or students from the Luveme Senior High School.
There are approximately 110 that are including this as a part of
their educational program, and I certainly welcome them to this
hearing. Thanks again for coming, and I look forward to the com-
ments from those of you in the audience that are not a part of the
regular panel.
Mr. Johnson. Thank you. Representative Minge.
We will proceed with three panels of witnesses in the conduct of
this hearing today. This is an official hearing of the U.S. House
Committee on Agriculture, and the record and will be shared with
our colleagues and staff back in Washington.
At the conclusion of the testimony from the panels today, we will
have an opportunity for those who are not formally on one of the
panels to express opinions or ask questions. We will have an open
microphone, at least for a reasonable period of time at the conclu-
sion of the hearing.
It will be important, however, for you to sign up on a sheet in
the rear of the hearing room so that our record keepers know for
certain who it is who is making their statements, and you will be
called based on your sign up sheet in the back. So please cooperate
with us in that regard if you are interested in your own comments
or questions.
The first witness we have is Mr. Kenneth D. Ackerman who is
Manager of the Federal Crop Insurance Corporation, U.S. Depart-
ment of Agriculture in Washington, DC.
Mr. Ackerman, welcome to the subcommittee. Your full state-
ment is received for the record of the subcommittee. You may
choose to abbreviate or to summarize however you wish, but please
do proceed.
STATEMENT OF KENNETH D. ACKERMAN, MANAGER, FEDERAL
CROP INSURANCE CORPORATION, U.S. DEPARTMENT OF AG-
RICULTURE
Mr. Ackerman. Thank you. I want to thank Chairman Johnson
and Congressman Minge and Congressman Peterson for having
this hearing today in Minnesota.
I agree with one point that has been made. It is very importsmt
in discussing proposal like this to have hearings in the field.
When we put our crop insurance proposal together within the ad-
ministration, we made a point to have meetings with farmers who
£ire affected by crop insurance in a number of States: North Da-
83
kota, Texas, Louisiana, Minnesota, Iowa, Maine, Nebraska, and
others, and we hope to continue that.
Washington, DC, is a very nice city, but there aren't a lot of peo-
ple there who carry crop insurance. If we are going to get feedback
on this program, it is important to discuss it here in Minnesota,
and South Dakota, and Iowa, and parts of the country where this
issue is very meaningful, a very part of the way of life of people
who live there. So having this hearing here in Minnesota is ex-
tremely useful, and I am very glad to be here this morning.
I made a point to bring some good weather with me from Wash-
ington, so you are welcome.
Mr. Johnson. We usually bring hot air with us, not cold air with
us. [Laughter.]
That's usually what happens when people from Washmgton come
home, but go ahead.
Mr. ACKERMAN. Well, we are new Democrats. [Laughter.]
As you know, about a month ago. Secretary Espy unveiled a very
major set of changes in crop insurance covering a lot of territory.
We very much appreciate the fact that this subcommittee has been
very prompt in holding hearings on this proposal.
Crop insurance is one of those programs that has been the sub-
ject of a lot of criticism over the years, a lot of call for change. We
hear dissatisfaction from farmers, from taxpayers, from Congress,
GAO, 0MB, Office of Inspector General of the Media. Virtually ev-
eryone who has looked at this program has had problems with it.
As a general matter, you can look at the current problems with
crop insurance as being a result of it being in the middle of two
current trends. Over the past half dozen years or so we have seen
an unprecedented parade of disaster affecting American agriculture
starting with the 1988 drought of the century, the 1989 drought,
the 1992 hurricane of the century, the 1993 flood of the half millen-
nium at the same time as a major drought.
Scientists disagree as to whether all these events are related —
whether or not they are, clearly, the risk of loss among American
producers is now foremost in their mind. Recent experience has put
it there.
At the same time while there is increasing demand for ways to
address risk, we base historic type budgets at every level of govern-
ment. As you know, the Federal Government in Washington is
dealing with a deficit in the multi trillions of dollars. Interest on
the national debt is one of the largest items in the budget, oyer
$200 billion a year. Deficit reduction has become one of the major
priorities of this period in our history.
Last year the Omnibus Reconciliation Act took a $3 billion hit
from Agriculture. Whenever you talk about deficit reduction, agri-
culture has always been front and center.
This years budget, similarly, has a major reduction in agri-
culture. As we go forward, we can expect that trend to continue as
well.
The problems with crop insurance were very much accentuated
by last summer's flood, or very much exposed by last summer's
flood and drought. The major problem was the sheer magnitude of
the disaster in rural America.
84
Just to give you a sense of the size of the problem, for the crop
year 1993, FCIC paid out a total of $1.64 billions, $1.6 billion in
claims to American farmers for losses.
By contrast, in 1992, the year of Hurricane Andrew, we paid out
about $920 million in claims. That is $700 million less. The dif-
ference being the magnitude of the destruction in American agri-
culture because of last summer's flood and drought.
To give you a sense of how this struck closer to home in this part
of the country, in the State of Minnesota, Minnesota was the State
with the single largest number of claims in dollar amount because
of destruction of last summer's flood. Farmers in Minnesota re-
ceived claims of $353 million from last summer's flood. The State
of Iowa, which is very nearby, farmers had claims of $281 million
South Dakota, $54 million.
So very large amounts of money needed to be paid out, and these
are insurance claims. This is money that farmers paid for. Cov-
erage they paid for, coverage that they earned.
Because of the simple magnitude of the problem, the amount of
loss, the size of the demand to get money out to people quickly be-
cause of the crises they were facing, this exposed a lot of problems
in our system. Everything from the lack of preventive planning cov-
erage, which, again, was a very significant problem in this specific
part of the country.
South Dakota, we estimate that about 1.1 million acres could not
be planted last year because of the rains that hit early in the year.
In Minnesota, 846,000 acres could not be planted last year. In
Iowa, 1.2 million acres could not be planted last year.
So the lack of preventive planning coverage as part of our core
policy was a very significant problem for farmers in this part of the
country.
There were problems with our price selections being too rigid.
There were problems with out placing some of our offices too close
to rivers. Some of our buildings got flooded out last year.
But one of the major problems that became evident during the
flood was one which several of you have referred to and that is the
fact that over the past several years in this country we have devel-
oped two systems, two Government programs existing side by side
trying to address the same problem.
We have a crop insurance program which costs American tax-
payers close to $900 million a year. That is a lot of money by any
way of figuring, even by Washington standards that is a lot of
money. Yet, despite that investment by taxpayers, the leverage of
cover is very limited.
In 1993, only 33 percent of potentially insured acres were in fact
covered by crop insurance. Only 83 million acres out of 250 poten-
tial acres were covered by crop insurance. As a result, when actual
disasters have struck, major droughts, major floods, Washington
has had to step in year in and year out with ad hoc disaster pro-
grams.
What has happened is that even though these disaster programs
are very important, we have tried to stress in this debate that
these disaster programs were very responsible actions by the Fed-
eral Government to address needs of citizens, these disaster pro-
85
grams helped hundreds of thousands of farmers and nonfarmers
alike survive one of the worst crisis in their adult lives.
The problem is that the uncertainty created by ad hoc disaster
bills has created a problem both for farmers and for taxpayers.
From the farmers point of view the problem is very straight-
forward. If you do not have crop insurance and you rely on ad hoc
disaster aid, you simply do not know in any given year whether
you are going to have protection and what your protection is going
Last week I was in the State of Louisiana, which was hit by Hur-
ricane Andrew in 1992. If you were one of those farmers that was
totally wiped out by Hurricane Andrew, you received a disaster
payment at 50 percent proration. That means you go through the
legal disaster formula which gets you down to about 40 to 45 cents
on the dollar to start with, and then it was cut in half because that
was the level of funding that the appropriations committees in
Congress were able to provide that year.
A farmer who suffered a complete loss from the 1993 flood re-
ceived disaster aid. Received this 40 to 45 cents on the dollar, fully
funded. They got the whole amount.
The difference to the individual farmer, if you are that farmer
suffering a full loss, it doesn't matter whether 1 State is affected
or 10 States were affected; you suffered a full loss. But because of
the ad hoc nature of these disaster programs, producers simply do
not know year in and year out whether they are going to get pro-
tection or what the protection formula is going to be. That is simply
not a good way to run your farm operation as a business.
From the taxpayer point of view, it is the same problem: uncer-
tainty. . , .V U
As you can see from the first chart in my testimony to the sub-
committee, over the past 10 years, Washington has provided these
ad hoc disaster payments for the last 8. And the average cost to
taxpayers for these crop loss disaster programs has been about $1
billion a year. Some years it was zero, some years it was way more,
but that is the average.
However, disaster aid is not subject to any of the budget dis-
cipline rules that apply to every other area of Federal funding. It
is not subject to the so-called pay-as-you-go rules. It is considered
emergency funding; it is passed and simply added to the Federal
deficit. , , .1. • r
What we have seen as a result is that over the years the size ot
these disaster programs has grown. So over the last 6 years the av-
erage has risen to over $1.5 billion a year, and each time there is
another disaster bill, the level of taxpayer resistance gets more and
more extreme. mi.- •
This is not only a phenomenon involving agriculture. This is a
phenomenon involving disaster bills for earthquakes, for fires, for
every other area of emergency spending.
We saw it very dramatically a few weeks ago when Congress de-
bated a disaster relief bill for the Los Angeles earthquake of about
$8 billion. Even though everyone in the country had seen the dev-
astation from Los Angles and knew the need of the assistance, the
bill was held up for several weeks because of amendments to tie
86
it to budget cuts. This phenomenon is one that we can very much
expect to go forward with or to see it go forward.
The proposal that Secretary Espy put forward for crop insurance
tries to get at these problems from a number of directions. The cen-
terpieces is a piece of legislation called the Federal Crop Insurance
Reform Act of 1994. The central premise of that bill is to try to
combine crop insurance and disaster aid into a single, unified, on-
budget program.
To do this requires two steps. First, we are proposing essentially
to create a legal barrier against future ad hoc disaster bills. Essen-
tially, we are taking away their emergency status under the Budg-
et Enforcement Act. To pass one, it has to be paid for with offset-
ting budget cuts.
Then, on the other side, to protect farmers in the absence of an
ad hoc disaster bill, we are proposing to expand the crop insurance
program. This expansion takes a number of forums.
The most significant one is the creation of a new level of protec-
tion called catastrophic coverage, which will be made available to
all farmers of covered crops. The Government would essentially pay
the premium. It is like a rainy day fund. The farmer would pay a
processing fee of $50 per crop per county with a limit of $100 per
county.
The idea is that this catastrophic coverage would replace the dis-
aster pa3anent. The level of coverage provided would be 50 percent
of yield at 60 percent of price. A level designed to be very similar
to what farmers have gotten under disaster bills for the past few
years falling between that 50 percent and 100 percent proration
levels.
In my testimony, I have provided you with some numerical ex-
amples of a com farmer, and wheat farmer, a cotton farmer, and
how this 50/60 coverage would protect them compared to the disas-
ter programs. This is the final four or five charts in the testimony
package.
The main difference, however, between catastrophic coverage and
disaster aid is that it is not ad hoc. It is an insurance contract. It
is a financial asset that a farmer has at the beginning of the year.
They can take it to the bank as collateral on a loan. If a producer
is the only one in the entire country suffering a loss, they know
they are protected. They don't have to worry whether farmers in
10 other States suffer a disaster.
In order to make sure that the largest number of farmers in fact
get their hands on this coverage, we are proposing to link it to par-
ticipation in farm programs and Farmers Home Administration
loans.
In other words, to qualify for a wheat deficiency pa5rment or a
com deficiency pa3nnent, a farmer must have acquired at least cat-
astrophic level of coverage under crop insurance. We project that
with this linkage, crop insurance participation would rise from its
current 33 percent level to about 80 percent. A very dramatic rise.
I know whenever you start to talk about linkages and mandatory
programs that raises a red flag. People don't like mandates. No-
body likes being told what to do. That is human nature, but we
think in this case the proposal is reasonable. The fact that we are
talking about a catastrophic level of coverage for which a farmer
87
pays $50 or $100 means that this is fairly not onerous, and the pro-
ducer is getting something in return. J.J ,^ 4. i. u
The main problem we wanted to avoid was we didn t want to be
in a situation where we go through the process of changing crop
insurance, spending the money on this, creating the legal barriers
against an ad hoc disaster program and then find 2 years down the
road we have a major drought or a major flood and that a large
number of farmers simply have not picked up the catastrophic cov-
erage for whatever reason. Either they were skeptical of a new
Government program or the word had not gotten out to them or it
was a matter of simple inertia. We wanted to make sure that farm-
ers would be protected. , t^ ,. c
We understand that 50/60 coverage is very low. For most farmers
they really need something better to operate in a responsible way,
to operate as a business. So we have provided in this legislation for
farmers to get crop insurance at higher levels.
If they purchase crop insurance at a 65 or 75 percent yield level,
they would enjoy an out-of-pocket cost reduction of about 10 to 15
There are a number of other elements to this that I will walk
through very quickly. In order to make sure that this coverage is
provided in the most convenient way, we are proposing to alter our
delivery system. For catastrophic coverage farmers would have a
choice. They could purchase it either through a private agent or a
county office of USD A. i -u u
Higher levels of coverage would remain available only througn
private agents. , ttt u
We would provide price competition among agents. We would say
that if one company could deliver crop insurance more efficiency
than another company, they could pass along the savings to the
farmer. We feel this is a way to cut down on overhead costs, and
to provide a more economical product.
For those crops that are not covered by crop insurance at all, we
would provide a standing disaster program. Currently, crop insur-
ance coverage about 50-odd crops. I have provided a list in my tes-
timony. I have also provided a list of about 20-odd crops that are
currently in the pipeline for being added to the system.
For those that are not on any of these lists, we would provide a
standing disaster program, similar to the disaster programs that
exist today, providing coverage level at that 50-60 level with an
area trisEer.
The cost of this program, the catastrophic coverage, the subsidies
for buyouts, and the standing disaster program, we expect to be
about $1 billion a year, slightly less than $1 billion a year on top
of the current cost of crop insurance. So we would go from being
about a $900 million program to about a $1.85 biUion program.
Conceptually, what we are proposing to do it to take that bilhon
dollars a year in real money that Washington is now spending on
ad hoc disaster aid and channeUng it into a crop insurance pro-
gram because we feel that this provides more certainty to farmers
and more certainty to taxpayers.
When Secretary Espy announced this program, we made clear at
that time that combining crop insurance and disaster aid standing
88
alone is not enough. There are other things we have to do to make
this program workable and to make this program accessible.
The second most important thing that we had to do was to make
this program fiscally sound. As you know, over the past 10 to 12
years, the crop insurance program has lost billions of dollars.
We have had a average loss ratio of about 1.47 going back to
1981. What that means is that in an average year we have paid
out $1.47 worth of claims for every dollar we've taken in in pre-
mium not counting overhead costs. If we were a private business
we would have gone broke long ago.
American taxpayers have sent the message loud and clear: they
will not pick up the tab for those kinds of excess losses anymore.
We now have a statutory mandate under the reconciliation bill
passed last year to get our loss ratio down to 1.1 by October 1995.
For that reason, we are going to be instituting a number of man-
agement changes to tighten up our program financially.
This includes more use of APH yields, actual production history
3delds; expansion of the current nonstandard classification program
designed to identify high-risk farmers and adjust their rates; an
emphasis on program compliance; continued risk-sharing with the
private sector; the implementation of a participant tracking system
to back our compliance program; and other steps of that nature to
make the program more financially sound.
It will mean that rates may go up in some parts of the country,
but we are trying not to rely on rate increases as the major way
to improve the financial soundness of the program. We know that
that can backfire. We have seen that backfire over the years.
We started raising rates a number of years ago. Harshly, as a re-
sult of that, where 5 or 6 years ago most farmers bought crop in-
surance at a 75-percent yield coverage level, today most farmers
buy it at a 65-percent jdeld coverage level.
I cannot trace that change directly to rate increases, but it would
be surprising if that were not a major contributing factor. So that
is part of the mix, but we are trjdng not to make it a major part
of the mix.
Finally, the other part of our program is we realize we have to
make crop insurance more flexible, more useable, more farmer
friendly. That concept implies a lot of steps. We are hoping to put
a number of additional options on the table for farmers.
We are going to try to improve more private insurance products
developed by the private sector. We are going to make a point to
listen better. We are going to look at bringing back a good farmer
discount that we had in the past that was dropped several years
ago that was a very popular element of the program.
That is basically the program that Secretary Espy laid out about
a month ago for crop insurance. We are very glad that the sub-
committee has held prompt hearings on it.
We hope that over the next several months it will be something
that farmers will look at, that producers will look at, and that will
be the subject of a lot of debate.
These changes will only work well if everyone is comfortable with
them. We hope that all parts of the agricultural community, farm-
ers, producer groups, lenders, insurance companies, will make a
point to study our plan closely and to get involved in the debate.
89
With that, I will cut off my statement. I would be happy to an-
swer any questions that you have.
[The prepared statement of Mr. Ackerman appears at the conclu-
sion of the hearing.! ., , • • e
Mr. Johnson. Thank you, Mr. Ackerman. It was the decision ot
the Chair to go ahead and allow Mr. Ackerman a longer period of
time to go over the outline of the crop insurance reform proposal
because he is manager of the FCIC, and I thought it was appro-
We will, hereafter, however, abide by the 5-minute rule. A red
light will come on, and we will limit our questions from the panel
to 5-minutes, and future witnesses will also try to meet the 5-
minute rule as well. , . « ^i. 4. <-
Mr. Ackerman, would you sum up for us briefly the current fi-
nancial status of this crop insurance reform proposal. The viability
of this entire proposal is dependent on our being able to take the
money that is currently being used for ad hoc disaster programs
and rechannel it, at least most of it, into crop insurance.
The House has passed a budget resolution. The Senate has done
something that does not involve funding for this program. There is
a conference committee going on, as I understand.
Would you run through a little bit about the future of this be-
cause obviously the one thing that we cannot do is pass a crop in-
surance reform proposal and then have it so under-funded that the
thing simply will not work. ^
Mr. Ackerman. This is a very important point. As you know.
Congress is in the process of deliberating on the congressional
budget resolution. As I mentioned before and as you mentioned,
this program is dependent on rechanneUng that billion dollars of
ad hoc disaster aid into the crop insurance program.
That requires us to change the budget baselines. Since ad hoc
disaster is an off-budget program and crop insurance is aii on-
budget program, we need to change the agriculture baseUne in the
congressional budget resolution by about $1 bilHon in order to
make this change. .
The House of Representatives, when it passed its version ot the
budget resolution several weeks ago, adopted the logic of our posi-
tion but with a different number. The baseline was adjusted to the
tune of, instead of $1 billion a year, it was $700 million a year for
the four out years and a smaller amount for the first year. This
was based on CBO taking a different view of the numbers from the
administration. *,- i n-
In other words, their total is $3 biUion rather than $5 billion.
However, we thought it was a very positive step because the House
had adopted the logic of the administration.
On the Senate side, the Senate essentially did not get to the
issue. As you know, on the Senate side the main issue and conten-
tion on the budget resolution was whether to cut an additional $26
billion in spending. , „ ,. r-
We did not want this issue to get in the middle of a crosstire on
that larger spending issue, so the Senate is basically neutral on the
crop insurance baseline adjustment.
90
This issue goes to a conference committee, I believe, starting the
middle of next week, a House-Senate conference. We are hoping
that conference committee will make the full baseline adjustment.
Since the House took one position, the Senate took a different po-
sition, this is a conferenceable item, and we are urging the con-
ference to make the full baseline adjustment.
Mr. Johnson. At this point it appeared to me that neither house
had adequate funds to make this reform viable, and it is going to
be imperative that we continue to work with the conference com-
mittee members in both the House and the Senate to give us great-
er access to those ad hoc disaster funds. Otherwise, this reform
proposal may, in fact, be stillborn.
It is going to be necessary for producers to purchase buy-up cov-
erage, it would seem to me, in order to be adequately protected.
Is there a risk that too many producers will take their virtually
free catastrophic coverage and feel that they are adequately cov-
ered and not be aware, as much as they ought, about the need to
buy-up greater coverage through the private crop insurance indus-
try?
Mr. ACKERMAN. There is a risk of that. It is a risk that we try
to take into account in designing this program. We agree very
much with your point that the more farmers who get higher levels
of coverage, the more sound the program will be and the better pro-
tected those farmers will be.
Catastrophic coverage should not be misunderstood. It is de-
signed to provide a level of payment, simply to replace a disaster
payment. No more, no less. That is why it was put like that.
We tried, in designing this program, to create incentives for
farmers to buy up. That is why we have the targeted financial in-
centives for farmers to go to the higher levels.
We have also created incentives for the private insurance compa-
nies to sell up. Insurance companies will get a better administra-
tive cost subsidy if they sell up. Agents will get a better commis-
sion if they sell up. So the incentives are on both sides.
Yes, there is a risk. We expect that in the first year of this pro-
gram probably most of the farmers coming in will get that cata-
strophic coverage simply because it is the easiest way to satisfy the
linkage requirements.
However, we are hoping that, over time, once they get into the
program, once they go through the mechanics of establishing their
AHP yield, produce their records, and learn what the program is
about, they will go to those higher levels of coverage.
Particularly, frankly, once we have a year with major losses and
Congress does not pass a major disaster relief bill, that will prob-
ably be the major cause that gets this program off the ground.
Mr. Johnson. The Chair recognizes Representative Peterson.
Mr. Peterson. Thank you, Mr. Chairman.
Mr. Ackerman, we had this discussion in committee about the
pilot program, and you said you were proceeding with that and
were going to have some kind of report by June. Do I remember
right?
Mr. Ackerman. This is on cost of production coverage?
Mr. Peterson. Right.
91
Mr. ACKERMAN. We have asked the Economic Research Service
of USDA to do a study on this. We have gotten back some prelimi-
nary information on that and we are hoping to make some decision
on that in the near future.
Mr. Peterson. For those folks that are not aware, I have put
some report language into a bill. What was it, last year?
Mr. ACKERMAN. Yes. The reconciliation bill.
Mr. Peterson. Right. Which would require the Department to
look at a pilot program in North Dakota, Minnesota and Mis-
sissippi, looking at some kind of revenue insurance based on reve-
nue or cost of production. Kind of like hail insurance, a different
concept.
They are moving ahead with that. If we can get it together, peo-
ple might have the opportunity to opt into that pilot program in
those three States, which I think could be useful. , ,.«.
Yesterday, I had some meetings in my district with different
folks. On this mandatory issue, in Stems County, for example,
when we didn't have a lot of people proving yields, they have a real
problem with their bases being way down.
They think, at looking at the preliminary situation with your
proposal, that given the circumstance with their bases and how
they are participating in farm programs now, that this might have
the effect of driving people out of the farm program in Stems
County. That was pretty much consensus because their bases are
so low, their com bases, that it is not going to be a good deal.
I guess maybe that is backwards though. You can be in the pro-
gram and you don't have to buy insurance.
Mr. ACKERMAN. That's correct.
Mr. Peterson. But then they are left with no coverage is how
they are looking at it.
I guess the question I am asking is, is there some way that we
can go in and look at particular situations where they have gotten
trapped? A situation where the basis is not realistic as to what it
really is? , v r j i 4.
The other problem we have in that county is that they teed a lot
of that com, and there is really— from what I can tell talking to
them yesterday— there is no mechanism to really account for that
in a good way. They are having a lot of trouble accounting for the
com that is fed and getting credit for it. ^ , i • j
So I think in Stems and Morrison Counties, some of those kind
of counties where you have got a lot of livestock and dairy and so
forth, I think we have a different kind of a problem that we haven't
really focused in on. I would like to visit with you about that or
your people because I think we are going to cause some problems
out there if we don't address this some how or another.
Mr. ACKERMAN. Let me comment just briefly on this.
First of all, as we go through the hearing process on this legisla-
tion, it is very important that we make— from our ppint of view as
well— that we make sure that this program works in different parts
of the country, so we very much want to look at these particular
counties to make sure that the formula works, that the program
works.
81-128 0-94-4
92
So we will be very eager to talk to you about that to make sure
we are on the same wavelength, that we will be able to accommo-
date that situation.
Just to be clear on the bases, on the yields, the way we are pro-
posing to structure this catastrophic coverage, it would be based on
an individual's APH yield, actual production history yield.
So you would bring in records, establish your own yield, and that
would be the basis for coverage, rather than using a program yield
or a county average yield.
Mr. Peterson. What do they have to bring in? Can they bring
farm management records?
Mr. ACKERMAN. Yes. There is a fair amount of flexibility on what
they can bring in.
It is true that for the situations with farmer who feed their com,
who raise com and then feed it on their property, who don't sell
it, it is sometimes more difficult to get records. In those cases, we
have to be more flexible, and we may want to look again within
FCIC to make sure that we we've provided enough flexibility for
that.
Clearly, we want those farmers to be using actual yields as well
because they generally get a better deal based on actual yields
than program yields.
We have taken some steps to allow farmers to use certain evi-
dences of what they have grown. For instance, the number of bins
that they use, the sizes of bins. Things like that to show their
yields. If we need to provide better avenues to show their yields,
we can look at doing that, but using actual yields generally pro-
vides a better outcome.
If I could say one more point without going too far into the red
light. There are a number of cases where going to actual yields
does place farmers at a disadvantage because there are some parts
of the country where yields simply have not been very good the
past couple of years. We have had a disaster year this year with
the flood. There have been other recent disaster years as well.
One change that we are going to have to make in the APH actual
production history program is a catastrophic yield adjustment for
at least 1 year, because there are simply too many areas where
farmers have had catastrophic years and their yields are inappro-
priately low.
The APH program is designed to come up with a realistic expec-
tation of what a farmer on a particular piece of land is going to
produce. A zero jdeld for a given year is just as unrealistic a projec-
tion as an inflated yield in an inflated year so that is one change
that we are going to have to make.
Mr. Johnson. Representative Minge.
Mr. MiNGE. I had a couple of questions, Mr. Ackerman. First, I've
noticed that some farmers in 1993 were in the 0/92 program which
meant that they plowed up their com and they had no yield, and
it was not counted as a base year in calculating the average pro-
duction on that farm.
Other farmers decided not to plow up the crop and instead har-
vested it, and they may have received, let's say, 35 bushels to an
acre and that was then considered one of the years.
93
Is there a way that you can reconcile the different ways that
farmers use the farm program in a year like we had last year and
not penalize those that tried to harvest a crop and minimize those
losses as against those that went into 0/92 and eliminate their
crop?
Mr. ACKERMAN. It is an interesting question on this. I may say
I may ask our chief actuary to comment.
As a general matter, yes, obviously, we need to do that. One of
the things that is going on parallel to this reform is that, within
USD A, we are in the midst of a reorganization where we are going
to be merged into ASCS to become a single agency.
As we do that we are going to have to align the programs to
make sure that a farmer is not disadvantaged being in one as op-
posed to the other.
In the particular situation of the 0/92 versus crop insurance, I
understand there has been some confusion about how those rules
work.
Let me introduce Jim Driscoll who is the Chief Actuary of the
Federal Crop Insurance Corporation.
Mr. Driscoll. Mr. Minge, the point you raised is interesting. It
is one I think we will have to handle through our catastrophic yield
adjustment procedure that we are now developing that Mr. Acker-
man talked about just a moment ago.
I am not sure exactly how it will be brought in at this time, but
I think our goal would be to recognize what the crop would have
produced in a normal year. That is what we are trying to do
through this cat yield procedure, not to count the zeros or the real
low yield, but with some floor in there.
Mr. MiNGE. So the goal is to look for what is a normal year, how-
ever, those figures are developed, and not let a catastrophic year,
whether you are in a program or not, in a program like 0/92, skew
the results?
Mr. ACKERMAN. Correct.
Mr. MiNGE. Well, it feels good. I hope that it is.
The second question I have deals with the problem of farmers
who, so to speak, farm Federal crop insurance. I haven't heard of
that as a problem in our area as much as it is in other States to
the south and east of here.
It concerns me that a catastrophic program where we have 50
percent coverage at 60 percent of the projected price may actually
be the type of program that those farmers in the Southern and
Eastern States find to their liking because they can essentially
farm Federal crop insurance, whereas the farmers in our area very
rarely would experience a 50 percent crop loss. Maybe last year
was the first year in the history of many of our counties that they
had a crop loss at that level.
How do you propose to work with this new proposal to avoid a
situation where certain sections of the country will continue to
farm Federal crop insurance, to the disadvantage of other sections
of the country who are trying to simply farm based on what the
economy indicates is a decent result?
Mr. ACKERMAN. I think your point is a very important one. If we
are going to expand crop insurance from 30 percent participation
94
to 80 percent, we have to be able to guarantee this program is run
with integrity.
Program compliance has to be one of our paramount objectives.
In the past we have had problems with program compliance. We
now have a compliance stsiff at FCIC of about 80 people nation-
wide, which is frankly not enough. We have a lot of territory to
cover.
In some parts of the country there have been indictments against
people for not only farming the program but committing fraud with
respect to the program. This is something that we have to crack
down on.
We are taking a number of steps to do this, and it is something
that we have to do more of. This is one area where our merger into
ASCS may turn out to be very helpful because we can share re-
sources with ASCS's compliance operation. We can have access to
their county offices on the ground where they are often closer to
the scene than we are, in order to help make sure that people are
working with this program in the proper ways.
We are also planning to sit down with the crop insurance compa-
nies because they have a stake in this also. They have a financial
stake in this. When there are losses in the program, they take
losses.
This year I think that fact was brought home more than any
other year. Collectively, the private crop insurance companies had
some very significant losses.
We also intend to work with the Inspector Greneral's office of
USDA.
Clearly, this question of program compliance is something we
have to put on a front burner if we are going to be credible in this
proposal.
Mr. Peterson. Thank you. The Chairman didn't tell me if he
wanted us to do another round, but I am going to take the preroga-
tive of the Chair and ask.
One of the other things that came up in my meeting yesterday
focused on this $50 per crop per county deal and whether it would
make more sense to base this on so much per acre, some small
amount per acre.
My question is did you look at that issue and if you did, why did
you opt for the system that you've set up? I assume you probably
did this to try to get the southerners, who are not wild about this
idea, to come into the program, but I guess I would just be curious
as to whether that went through your deliberation or not.
Mr. ACKERMAN. We did look at that and that is still a point that
comes up in quite a lot of meetings.
The reason we chose a $50 processing fee rather than a dollar
per acre amount was we wanted to make it clear that this is not
premium that is being paid.
The government is paying the premium, much, like I said, as a
rainy day fund. What the farmer is paying is the cost of filing the
papers. That is why a processing fee of a set amount makes sense
rather than trying to come up with a formula based on the size of
the farm.
95
It is true that if a farm is big enough to be in two or three coun-
ties the fee can be raised to several hundreds of dollars, but within
a county it is $50 no matter on the size.
The reason that we wanted to pick a low number like that was
because of the mandatory linkage. We felt that the mandatory link-
age was very important for this program to work right and that if
that was going to be acceptable in a broad way we needed to have
a processing fee that was reasonable.
Mr. Peterson. I guess the Chairman has a couple of more ques-
tions, so I will just follow-up.
I want to visit with your actuary about what the numbers are
and so forth. On the top coverages, 85, 75 and 65, you have some
buy down that is going to be made by the government in the pre-
miums.
It is unclear to me — maybe it says in there and I just missed it —
do you have actual amounts on that? What are the levels at each
level?
Mr. ACKERMAN. If you buy 65 percent yield coverage, the way our
proposal is written right now you would get an out-of-pocket dis-
count of about 15 to 16 percent.
If you get 75 percent level coverage, you would get an out-of-
pocket discount of about 8 or 9 percent.
Mr. Peterson. What about 85 percent?
Mr. ACKERMAN. Eighty-five percent we are currently going to
offer, and under this legislation we would have the authority to
begin offering it. We have not run the numbers on it yet because
it is not something that comes through that.
Mr. Peterson. If you can fit this in, would you envision giving
some kind of discount on that as well?
Mr. Ackerman. Yes. The way the formula works that downward
slope would probably continue.
Mr. Peterson. Why don't you discount the levels the same as
the 65 percent and 75 percent? Is there some reason why you have
different discount levels?
Mr. Ackerman. The reason we did that is because of the way the
formula runs.
I will tell you frankly that since we have sent this bill forward
several people have made the suggestion of why not take some of
the money we are proposing to spend at the 65 percent level, and
spend it at the 75 percent level, in order to make that more attrac-
tive.
Mr. Peterson. Yes. That is what I was thinking. Are you looking
at that?
Mr. Ackerman. Yes.
Mr. Peterson. Also, at the 85 percent level the discussion came
up in my meeting that there should be some consideration given
there as well.
To some extent I think this ties into the yield question and the
base question because what people are getting at is trjdng to figure
out some way to make a system that works.
You can come at it two different ways. You can come at it from
the base or from the premium level, so I am glad to hear you are
looking at that.
The chairman is back. I guess he has some additional questions.
96
Thank you.
Mr. Johnson. Thank you for taking over, Representative Peter-
son,
Are there any further questions by members of the panel?
Well, Thank you, Mr. Ackerman, for your testimony and your re-
sponse to our questions, and we will turn now to our second panel.
Mr. Ackerman. Thank you.
Mr. Johnson. The second panel is comprised of Mr. Al
Christopherson who is President of the Minnesota Farm Bureau
Federation of Pennock, Minnesota; Mr. Richard Peterson who is
vice president of the Minnesota Com Growers on behalf of the Min-
nesota corn growers and soybean producers of Mountain Lake,
Minnesota; Mr. Frances Buschette who is a member of the Min-
nesota Wheat Growers of Renville, Minnesota; Mr. Grerald Lacey
who is president of the National Barley Growers Association; and
Mr. Dave Frederickson who is president of the Minnesota Farmers
Union of Murdock, Minnesota.
We welcome you to this subcommittee hearing. We are very
grateful for your willingness to share with us your insights and
where this country should be going relative to crop insurance and
disaster programs in general.
Your full statements are received for the record of the sub-
committee, but you may want to summarize. Whatever you are
most comfortable with. Try to keep your statement within 5 min-
utes.
We will proceed in order. We will have each of you testify first
prior to members of the committee asking you questions.
We will begin with Mr. AI Christopherson.
STATEMENT OF AL CHRISTOPHERSON, PRESIDENT,
MINNESOTA FARM BUREAU FEDERATION
Mr. Christopherson. Thank you. I want to thank you for the
opportunity to comment on Federal crop insurance reform and its
impact on Minnesota farmers.
I certainly would like to commend the subcommittee Chairman
Johnson and Representatives Minge and Peterson for bringing this
important hearing to Minnesota to hear from farmers firsthand.
I would also like to commend the Clinton administration for rec-
ognizing the tremendous need for reform of the Federal crop insur-
ance disaster programs.
With a national utilization rate of less than 30 percent, the an-
nual average disaster payments of over $1 billion a year, the time
has come to completely overhaul a system that isn't working for ei-
ther farmers or taxpayers.
Secretary Espy has accurately commented that the current pro-
grams high premiums and spotted coverage combined with a disas-
ter program to virtually guarantee low participation in the pro-
gram.
The time to reform the system in a serious and comprehensive
manner is long overdue. The existing combination of inadequate
coverage in disaster programs satisfy no one who is involved.
The stated goal of the Clinton reform proposal is to boost partici-
pation in the crop insurance program by providing adequate cov-
97
erage to producers and thereby eliminating the need for emergency
disaster assistance.
The Farm Bureau fully agrees with this central goal, and are
committed to helping this restructuring occur.
Farm Bureau policy states that crop disaster programs and crop
insurance should be combined into a single voluntary program de-
signed to obtain the greatest amount of participation. We can all
agree that today's pattern should be replaced with a more common
sense and responsible model.
As you know, the Clinton plan compels farmers to purchase the
minimum amount of Federal insurance on eligible crops before par-
ticipating in any USD A program.
This mandatory part of the program is our most fundamental
and practical and philosophical objection to the reform plan. An un-
attractive crop insurance policy cannot be made to look pretty to
farmers simply by mandating programs participation.
This avoidance of the crop insurance program's basic inadequa-
cies will not result in a long-term solution to the problem. We need
a program that makes crop insurance a good idea in the free mar-
ketplace.
TTie shortcut provided by mandated coverage virtually assures
that budgetary and other pressures will continue to force a Federal
crop insurance program that simply does not make sense economi-
cally to the typical farmer. This is precisely why participation is so
low nationwide today.
The mandatory provisions combined with a cost that is bound to
grow with time and budgetary pressures also establishes a state
control mechanism that could become extremely costly to farmers.
Although the fees for catastrophic coverage are very limited in
the initial proposal, fiscal reality suggests that this pricing system
may not remain inexpensive very long.
Our policy has consistently opposed mandatory linkages between
crop insurance and farm program eligibility. The most cross-compli-
ance restriction and mandatory conditions we add to Federal pro-
grams, the less basic business decisions are left up to the farmer
in the marketplace.
In addition, our members oppose the programs' continued reli-
ance on yield as the trigger mechanism for insurance payout. Cov-
erage based on dollars per acre to us seem to make more sense. Re-
liance on yield as a determinant tends to skew the program in
favor of high-risk production acres, and makes it much more likely
that gaps in coverage will exist.
Although we recognize that full consideration of crop instance re-
form may not occur until the 1995 farm bill, we pledge our commit-
ment to work with the administration and Congress to design a
workable program that meets all of our goals.
I am convinced that all psirties can come together to fix a system
that is clearly broken. Again, however, in order to do that we must
design an insurance program that good business people will want
to purchase, and we don't feel that wider mandated coverage will
eliminate the possibilities and further complicates the maze of Grov-
emment requirements.
[The prepared statement of Al Christopherson appears at the
conclusion of the hearing.]
98
Mr. Johnson. Thank you, Mr. Christopherson.
Mr. Peterson.
STATEMENT OF RICHARD PETERSON ON BEHALF OF THE MIN-
NESOTA CORN GROWERS ASSOCIATION AND THE MIN-
NESOTA SOYBEAN GROWERS ASSOCIATION
Mr. Peterson. I am Richard Peterson. I am representing the
Minnesota Com Growers and the Minnesota Soybean Growers here
today.
I want to thank the committee for coming to southern Minnesota
to hear our concerns regarding Federal crop insurance reform,
I farm just east of here in Jackson County.
I would also like to introduce the State director of the Minnesota
Soybean Association who is here today in the audience, Leroy
Kellenberg from Beaver Creek.
Mr. Johnson. Welcome to the subcommittee.
Mr. Peterson. We have put our written statement together and
you have that.
Our main concern would be the top end coverage. I have had
Federal crop insurance over the years. From 1986 to 1992 we have
had the 1988 drought and also 1991, which was an extremely wet
year.
The 65 percent coverage just doesn't do it. We come up with a
65 percent crop, but with toda3^s prices it is just not enough to
cover expenses.
What we would really like to stress is that we can get that 75
percent coverage for at least what it costs us today for the 65 per-
cent coverage, and that the 85 percent coverage should be available
to farmers.
There is another concern we have with the group risk plan. The
problem with that, using county averages, is that the soil types
from one farm to another let alone from one side of the county to
the other, varies. And I don't think that it would be a fair program
for the farmers.
The production needs to be based on the yields coming off of the
particular farm that is insured.
Thank you.
[The prepared statement of Richard Peterson appears at the con-
clusion of the hearing.]
Mr. Johnson. Thank you, Mr. Peterson.
We will turn now to Mr. Buschette.
STATEMENT OF FRANCIS BUSCHETTE ON BEHALF OF THE
MINNESOTA ASSOCIATION OF WHEAT GROWERS
Mr. Buschette. Thank you. My name is Francis Buschette and
I farm near Renville, Minnesota and raise wheat, sugar beets, com
and soybeans.
I am testifying on behalf of the Minnesota Association of Wheat
Growers. We appreciate this opportunity to express our views on
the proposed Federal crop insurance reform and whether it could
adequately replace the disaster program.
Let me begin by sa5ring that the Minnesota Association of Wheat
Growers would support a significantly improved better crop insur-
ance program over the disaster programs we have had in the past.
99
We recognize the funding problems associated with having both
an improved crop insureince program and a standing disaster pro-
gram. However, we believe an adequate, affordable and proven new
insurance program should be operational before all disaster author-
ity is abandoned.
A strong basis for development of a viable new program is on the
drawing board, but until such a time that a new regime of jdeld
and price risk protection is proven to be effective, we urge contin-
ued standby authority for disaster relief programs.
On the specifics of crop insurance reform, we strongly support
the actual production history based on 4 years. However, a high
priority for FCIC should be to develop and implement a cata-
strophic yield clause. This would stop the actual production history
yield reductions for producers in a region that has experienced ab-
normally high losses during the 4 years of the APH.
This need is very evident in Minnesota when you consider that
the loss is due to a 100-year flood will account for 25 percent of an
individual's APH.
On the positive side, the decision to use individusd APH as a
base for catastrophic yield coverage instead of an average or ASCS
3deld is very important and it is a welcomed improvement over the
disaster program.
In another comparison, we find that the disaster program has ad-
vantage over Federal crop insurance when it comes to de minimus
yields. The lack of a de minimus yield for crop insurance has been
a glaring negative factor for growers, especially in light of ASCS
implementing a de minimus jdeld in last year's disaster program.
This inequality needs to be corrected.
For many wheat producers, the catastrophic coverage will not be
adequate to meet their risk management needs, so they will want
to purchase additional insurance. The reform proposal with addi-
tional funding should provide reductions in premiums at the higher
coverage levels.
This would be very important for long-term crop insurance cus-
tomers who will want to see benefits from reform.
One possible benefit could be reduced premiums at the 65 and
75 percent coverage levels under the proposed reforms. Neverthe-
less, what effect this reform proposal will actually have on pre-
miums for increased coverage is something we will want to know.
Finally, we believe that additional premium subsidies should be
extended to the 65 and 75 percent coverage levels, which would
help make this reform package adequate enough to replace disaster
programs.
Thank you for this opportunity to express our views.
[The prepared statement of Mr. Buschette appears at the conclu-
sion of the hearing.]
Mr. Johnson. Thank you, Mr. Buschette. You are hearing evi-
dence that our part of the country is not exclusively Johnsons,
Christophersons, Petersons and Fredericksons. It's good to have
you here.
Mr. Lacey.
100
STATEMENT OF GERALD LACEY, PRESIDENT OF NATIONAL
BARLEY GROWERS ASSOCIATION
Mr. Lacey. Good morning. My name is Gerald Lacey and I grow
barley, wheat and sugar beets with my son on a farm near Camp-
bell. 1 m currently serving as president of the National Barley
Growers Association It's an honor for me to be here this morning
and testify in front of this subcommittee.
We as farmers understand that reform is needed to keep abreast
with the ever-changing world. We also understand the difference
between meaningful reform and budget-driven poHtical reform. It's
ditlicult for me to testify on this proposal when the Senate just
voted to reduce expenditures for crop insurance.
I would hope that you, as elected officials, would put aside the
political bickering and assist us producers in estabUshing a Federal
crop insurance policy that would adequately protect us from the
whimsical ways of Mother Nature. I would Uke to address three
main concerns in my testimony this morning.
4.u^^al^ ni^^'} ^°^^*^ ^^^® ^° address the percentage of subsidy for
the 65, 75 ^d the 85 percent price protection; second, consider al-
lowing AbCS to possibly sell the coverage; third, to support a gross
xT^^^^^ insurance pilot program for Minnesota, Mississippi and
North Dakota.
We agree that catastrophic coverage must be offered to producers
m order to get participation up to the level where everyone will feel
comfortable that there will be no more ad hoc disaster bills We
would suggest increasing the rate of the subsidy provided for en-
rollment in the 65, also the 75, and in the 85 percent level of price
protection Producers are being pushed into higher price selections
becaoise of the constant increase in the cost of production; also as
It effects our yield, our yield history in these losses that we've had
over the last few years.
iolr?^i^® taken out Federal crop insurance from my agent since
1989. During this time, I had no way to shop around, as I do for
hail. For hail insurance, there seems to be some competition and
there is no Government guaranteed commission. I would like to
suggest that we allow the ASCS offices to opportunity to sell Fed-
eral crop insurance policies. This is not new or unique, but some-
thing they have handled in the past.
I would also suggest that the ASCS offices be allowed to charge
^ ■^?j^u^^ j^^ ^®® ^° ^°^^^ ^^^^^ ^°^^^ °^ ^°^^S business. Perhaps this
could be done on a pilot project basis and perhaps even on a bid-
ding basis by the private insurance industries to compete with the
ASCS.
I make this suggestion in the hopes that the insurance compa-
nies will be challenged to make their money competitively in the
market, not through a controlled, guaranteed system. The burden
of balancing the budget should not have to be borne solely by the
producers and not by the rest of the industry.
Third, a pilot program that has been mentioned already this
morning. As a representative of the Minnesota Barley Growers As-
sociation, I would like to speak in support of introducing a gross
revenue insurance program on a trial basis in Minnesota, Mis-
sissippi, and North Dakota. My thoughts behind this are fairW sim-
ple.
101
Lenders are not at all concerned about how many bushels a pro-
ducer grows on an acre, but rather how many dollars per acre that
farmer produces. We would like to see if we couldn't devise a pro-
gram that would have a farmer insure his gross revenue.
Although many of the technical points would have to be worked
out, I envision a program whereby a producer would be able to in-
sure his minimum gross income based on perhaps his last 5 years
average gross income as shown on his individual tax form.
I'd like to thank the subcommittee for allowing us to testify this
morning. I'd be happy to answer any questions.
[The prepared statement of Mr. Lacey appears at the conclusion
of the hearing.]
Mr. Johnson. Thank you, Mr. Lacey. Finally, Mr. Frederickson.
STATEMENT OF DAVE FREDERICKSON, PRESIDENT,
MINNESOTA FARMERS UNION
Mr. Frederickson. Thank you, Mr. Chairman. I want to point
out that even though Mr. Buschette's name is different from the
rest of us, he has been influenced by the Scandinavians in his area.
I also want to thank you. Chairman Johnson, and members of the
subcommittee for your willingness to come into Representative
Minge's district, one of the hardest hit districts by the flooding in
1983.
I've spent the last few days reading about Federal crop insur-
ance, to the point where my eyes have started to glaze over, most
recently about 10:00 last night. Normally, all I do is buy it. When
I started to farm in 1974, which is coming up on 20 years now, I
asked my dad if it would be a good idea if I buy this stuff called
Federal crop insurance and he informed me that it probably wasn't
such a good idea because he had farmed all of his life and he never
got a red cent out of them.
All he had to do was pay the premium and being a smart-aleck
kid, I thought, well, maybe I should try to buy some of this stuff,
and I have over the years bought it on and off again. I chose a
rather smart move, I thought, in 1993 to drop the coverage. I
laughed a little bit about that, too, when I dropped it, but then I
got pretty panicky about halfway through the summer.
But then as it turned out, even with the worst flooding in my
history and I'm sure the history of many of the people in this room,
we in Swift came in with about half a crop. So at the 50 percent
level, I, with the jdeld I had of about 52 bushel an acre, still would
not have ended up receiving the cost of that premium, and, in this
case, that's something in excess of $3,000 had I gone in last year.
My point here, I guess, is that if you can provide the — and,
again, to the questions that you asked. Chairman Johnson, in your
letter. The adequacy of catastrophic coverage, I think, is a wonder-
ful idea, because I could take that $3,000 that I would have spent
last year or $4,000 or whatever it might be and buy up. I think
that's what this whole issue is getting to, the opportunity for us to
take the money that we normally would have invested in a Federal
crop program and give us the opportunity to buy up, thus making
this program actuarially sound, hopefully.
You have, Mr. Chairman and members, a copy of the testimony
in front of you. For the sake of brevity, I'll just try to quickly sum
102
up the points that I tried to address in response to the letter of
March 17.
The adequacy of catastrophic coverage — and, by the way I also
want to take the opportunity to thank you for the hard work that
you put into the ad hoc disaster program of 1993. We hear a lot
of talk about the fact that we don't want those again. I'll tell you
what. In my home county and, frankly, in the State of Minnesota
without that ad hoc program, several farmers would have been in
deep trouble as we move into the 1994 planting season.
So I want to personally thank you and I know from the members
of the Minnesota Farmers Union for the hard work that I know all
of you put into that program.
We think, if funding permits, it would be helpful to increase the
60 percent to a figure closer to 100 percent of target price still
using the 50 percent deductibility. The processing fee; we find the
processing fee to be very reasonable and, again, it addresses the
issue of processing and not anything other than that.
Mandatory coverage; the National Farmers Union and the Min-
nesota Farmers Union supports making the coverage mandatory to
farm program participants. However, the farmers and certainly I
may have a different position if the processing fee were to be in-
creased. The dual delivery system offers producers the option of
where to obtain the catastrophic coverage. We support that.
A key point here, the use of actual production history; the use
of actual production history would make crop insurance a better
product for producers who are above the coimty average and would
also help in preventing the farmers from farming the program, an
issue that you and Mr. Ackerman addressed, and Mr. Minge and
also Mr. Peterson early on.
The requirement to insure all land in the county for a particular
crop. It is appropriate to require a producer to include all land in
a county for a particular crop. However, the dryland crops, such as
wheat, should not be averaged with irrigated crops. These should
be a separate unit.
Adequacy of the buy-up coverage for insurable crops. The buy-up
coverage should extend higher than the 75 percent election rate, we
feel. Provisions for noninsured crops. My sense of this is the ques-
tion might have been a little unclear. Does noninsured mean no in-
surance is available or that the producer chooses not to purchase
insurance? We'd recommend that the producer be required to estab-
lish production history before being allowed to insure a crop that
had never been planted in the previous years. This would guard
against, again, producers farming the program.
The amount of premium subsidies at different levels of coverage.
If the goal is to encourage producers to purchase adequate cov-
erage, then subsidy should be offered as a percent of the premium
instead of just a flat dollar amount for current subsidy, which is
the same whether the producer purchases coverage at 65 or 75 per-
cent level and encourages producers to purchase only the 65 per-
cent level of coverage.
I see the light is on. You have, again, in your packet the testi-
mony of the Minnesota Farmers Union. Thank you for the oppor-
tunity. ^
103
[The prepared statement of Mr. Frederickson appears at the con-
clusion of the hearing.]
Mr. Johnson. Thank you, Mr. Frederickson, for your testimony.
I appreciate the insights of all members of this panel. I think
they're very useful to us and to our subcommittee.
Mr. Christopherson, I think a lot of us share, to one degree or
another, your concern about mandatory programs. Whenever the
word "mandate" comes up, I think all of us sit up a little straighter
because it's not something that we are ever very enthusiastic
about.
I think you can understand the balancing act that necessarily
has to go on here. The crop insurance is mandatory only if you take
taxpayer subsidies in the first place because you belong to the farm
program, and the taxpayers are, in effect, insisting that if you take
their dollars, then you also must participate in a program that will
free them of the pressures for ad hoc disaster programs in the fu-
ture.
The other concern is that if we have too little a sign-up, it may
destroy the viability of the entire system because it's going to cre-
ate tremendous pressures than to step back and do something to
help all these people out.
So the bad news is it's mandatory. The good news it's virtually
free. But I would agree with you that if we do this, we'd better
keep a close eye on the tendency to start with a $50 sign-up charge
and then have it inflate and get out of hand and after a while be-
come a very substantial cost.
I guess that's more a comment than a question. There has been
some discussion about, well, taking away the mandatory nature of
it, making people come in with a waiver statement or something
of that kind, I don't know if that would have any interest to you.
Mr. Christopherson. Let me comment just a little bit about the
mandatory portion. You probably alluded to a clue to the problem
when you made the comment about the Scandinavian heritage of
this table here. We tend to be somewhat obstinate, some of us more
than others.
Certainly, the mandatory portion, I guess, bothers us to the ex-
tent that it does take away one more of the decisions that farmers
have to make. And while I recognize the consequences are not
great, I guess as the principal of it, we are not required to buy hail
insurance, we are not required to buy fire insurance, et cetera, but
they are prudent economic decisions that most farmers, I think,
make.
So I guess that is where we're coming from with regard to the
mandatory aspect of it. I would be hard pressed to make a very
strong argument against it, other than on principal.
Mr. Johnson. The remaining members of the panel, I think, all
raised a very legitimate point about the concern that there has to
be some support there for people to buy up, to get more than the
catastrophic coverage. Otherwise, it's going to remain to be an in-
adequate risk management tool.
Again, the balancing act we have is how much money do we
have. It's going to require a substantial amount of the money to
provide that virtually free catastrophic coverage. That leaves only
104
a modest amount of money to help subsidize the higher levels of
coverage.
A ^nM*^^^^ ^^^ °^y°" ^^^^® ^ ^®^ good point that we need to
ao all that we can to encourage the higher signup.
Mr. Peterson, do you have any particular problem with the dual
delivery system, where you can buy the whole thing from your in-
sm-ance agent or you can buy just the catastrophic from the ASCS
oiiice.'^
Mr. Richard Peterson. I guess the only problem we've got is
^ AoU^^'^'ll K''''^^ *^® Government to train these employees in
the ASCS or the Farm Service offices and then how much more pa-
perwork it s going to create for them.
Maybe what we should do is instead of training them to do what
the private agents are doing already is to use that money to sub-
sidize that 75 or 85 percent coverage
Mr. Johnson. That's a possible tradeoff". Part of the problem is
that, at least initially, in many parts of the country, as Mr. Acker-
man has noted, there simply are not enough agents out there Our
part of the country tends to be fairly well served with a lot of well
trained professional crop insurance agents. There are some parts of
the country where that simply is not true.
If we're going to go from a 30 percent sign-up to an 80 percent
sign-up in one huge leap, we may need the resources of both ASCS
or the FSA and the crop insurance industry to deliver that. But I
think you raise a good point about how we're going to have to look
very carefully about how to best utilize each additional dollar avail-
able, because to the degree possible, we want to spend it delivering
a quality product, not in reinventing or creating more bureaucracy
and administrative expense. That's a good point.
I will honor my own red light promises and recognize Mr. Peter-
son.
Mr. Peterson of Minnesota. Thank you, Mr. Chairman. Mr
Lacey, you were suggesting in here raising the subsidy rates on the
65, 75 and 85. Do you have an idea how we would do this where
the money would come from? Have you folks thought that through
at all? ^
Mr. Lacey. First of all, we need that money that comes from the
disaster. That's the first piece that we need in order to make this
thing work. Then I think we need to go back to the disaster part
of It, the free part of it. I don't see that as being fair, and I will
tell you why. The person with 100 acres of barley and the person
with 2,000 acres of barley are going to be paying the very same ad-
ministrative expense, so-called, for a whole lot more coverage.
I don't think that's needed nor fair. I think that that large farm-
er producer can afford to pay something to subsidize that higher
coverage that we all need in the first place. So I guess that's where
I would attack that, putting some kind of a fee, and I think that
will have to be— that's the reason we've got all the expertise that
we ve got in the Department and that can be figured out.
But whatever it takes to make a more level percentage of subsidy
to the 65, 75 and the 85, I truly believe that there's a lot of us out
there that do need the 85 to satisfy our bankers.
105
Mr. Peterson of Minnesota. How do the rest of you feel about
that idea? I think, Mr. Frederickson, you were pretty clear that you
don't think much of that idea, I gathered from your testimony.
That you pay so much per acre or something like that. That's
what Mr. Lacey was alluding to. But using that money to buy down
the higher levels. I sense that you folks don't think that's a good
idea.
Mr. Frederickson. Mr. Chairman, Representative Peterson, we
didn't necessarily see that as a problem. We recognize it as a proc-
essing fee. However, I will say that some of our members up in Mr.
Lacey's area have indicated a concern on the large farm versus the
small farm, sa3dng why is it that the large operator would get the
benefit of this for $50 or $100 and I would get the same thing if
I only raised 100 acres of wheat.
So I would be remiss if I didn't point that out. But in the main,
the Minnesota Farmers Union has not seen that as a huge prob-
lem, understanding it as a processing fee. So I guess we don't have
a problem.
Mr. Peterson of Minnesota. Do any of the rest of you have any
ideas? Are you for or against the idea of charging so much per acre
and then using that money to buy down the top?
Mr. Buschette. Speaking for myself and not for the Minnesota
Wheat Growers, I would have no problem with a small fee and
helping to do that.
Mr. Richard Peterson. I guess the Minnesota Com Growers
and the Soybean Growers, we've felt that it should be no hardship
for somebody to be paying $100 for the coverage. We don't have a
problem with it the way it is.
Mr. Peterson of Minnesota. What about if we put a 50-cents-an-
acre charge on, then what? And then use that money to buy down
the top prices.
Mr. Richard Peterson. That would be all right, too. I have had
comments when I brought this up to farmers and there has been
some of that feeling that the large producer is getting by cheaper
than the small one. I don't think that would be a problem, either,
that way if it was at a low enough rate.
Mr. Peterson of Minnesota. Do you think that would force peo-
ple out of the system?
Mr. Richard Peterson. I really think what we need is if we're
going to t£ike the ad hoc disaster away from the farmer, he's not
going to make any money if he has a crop loss at 50 or even 65
percent. I could testify for that. Since 1986, my brother and I took
insurance up until 1992. We spent $27,000 for Federal crop insur-
ance and we had a 65 percent crop in 1988 with the drought and
then 1991 was wet, and we got $2,100 back out of Federal crop in-
surance.
I must say that 65 percent of the crop didn't pay the bill.
Mr. Peterson of Minnesota. Could I get
Mr. Johnson. Follow that up, Mr. Peterson.
Mr. Peterson of Minnesota. No. I just wanted to get Mr.
Christopherson's reaction.
Mr. Christopherson. We would have, I guess, no position on
that at this point. It's something that we have not discussed, other
than I suspect we would lean on the side of fiscal and sound under-
106
writing. So I guess maybe from that standpoint, we might be sup-
portive of that type of thing.
Mr. Peterson of Minnesota. The actuary of the Department is
here someplace. Could you run the numbers of how much we would
raise if we charged 50 cents an acre versus what we would raise
with this $50 processing fee and get that to my office sometime
when you can in the next couple to three weeks? I'd just be inter-
ested in how much money that is and just for my own curiosity,
if you can do that. Thank you.
Mr. Johnson. You gentlemen recognize that you make a change
away from a processing fee to a different kind of concept, but it is
something the Committee should consider. Mr. Minge.
Mr. MiNGE. I'd like to certainly welcome the panel here since sev-
eral of them are people that I've known for an extended period of
time. Mr. Frederickson, at one point, represented me and I guess
what comes around goes around. Well, we're still evaluating your
representation.
We have talked here this morning about the interplay between
crop insurance and disaster programs and the mandatory fee,
things such as that. I would like to shift the focus a little bit to
the problems that we've had with Federal crop insurance, espe-
cially as they were highlighted in 1993 and possibly problems that
you identified earlier.
We've had preventive planting or the lack of preventive planting
coverage. That has been corrected. Some of the harshness of late
planting penalties have been lifted.
I'd like to ask each of you to just give what you think are the
most significant or what is the most significant surviving problem
with the mechanics or the policy for Federal crop insurance that
have not been touched upon in this otherwise fairly general discus-
sion about disaster and Federal crop insurance. Start with Mr.
Christopherson.
Mr. Christopherson. I guess just offhand, the overriding issue,
as I see it, is the 5delds and the evidence, I guess, given by several
of the panel members here that really what it boils down to is not
a sound economic decision. And while we have touched upon that,
that is the overriding issue and that is the overriding issue along
with the fact that we have the ad hoc disaster programs that come
along that I think make the program not what it ought to be.
Mr. MiNGE. Mr. Peterson.
Mr. Richard Peterson. I guess as far as your test on late plant-
ing or preventive planting and then the planting dates, the im-
provements that were made to the 1994 crop season is going to be
helpful. But I still think we need higher coverage. Mr. Ackerman
said that the Federal Government wants to have 80 to 90 percent
participation. The only way you're going to get that is get that
higher coverage affordable.
Mr. MiNGE. Are you suggesting that if we're going to subsidize
Federal crop insurance to the tune of more than $1.5 billion a year,
rolling disaster and Federal crop together, that instead of providing
catastrophic policy that's essentially free, just a sign-up fee, that
we ought to look at subsidizing Federal crop insurance throughout
the levels of coverage and charging a substantially higher fee for
107
the catastrophic coverage that would reflect the cost for that cata-
strophic coverage?
Mr. Richard Peterson. There is one thing. Being we're getting
that catastrophic coverage basically for just a fee, it should help
some. It's just that the whole problem with the crop insurance now
is what I just told you, that it's not hard to see why a farmer
wasn't taking it. The 65 percent is the only one you could really
afford. The 75 was too expensive.
And when it got right down to it, it was poor in terms of cov-
erage. That's why I stress that we need a hagher coverage avail-
able.
Mr. MiNGE. Thank you. Mr. Buschette.
Mr. Buschette. Mr. Minge, I guess I would have to follow along
the same lines as Mr. Christopherson. When you've had 2 or 3
years of disaster in a row, your yields get so low that even covering
insurance, you're not protecting anything as far as your banker is
concerned.
You get down to where your total package isn't much at all. So
there has to be some way of, when there is a disaster, maybe to
go back to a county yield or something for that year to plug that
in instead of going down to a 65 percent. Otherwise, you're not get-
ting enough coverage for what you're buying.
Mr. MiNGE. Thank you. Mr. Lacey.
Mr. Lacey. I think one of the real hangups with the program, at
least in my area, is now we're going to have our Social Security
number attached to the application so that they can find all those
bad apples. I think we're going to find that those bad apples that
are costing the system so much are in bunches. Every one of those
bunches is being fostered by a bad apple agent.
It takes cooperation in order to make that thing work. We're
finding that and I hear rumors that there's going to be more inves-
tigation back up the line. There's a percentage that want to work
the system and it's costing us all dearly.
Mr. Minge. Mr. Frederickson.
Mr. Frederickson. Mr. Chairman, Mr. Minge, what was the
question?
Mr. Minge. What feature of Federal crop insurance do you feel
needs to be improved in order to make the product a more attrac-
tive product for farmers and a better product to serve your needs?
Mr. Frederickson. Mr. Chairman, Mr. Minge, I commend the
administration on the work that they have done on this reform
package. I think they're right on the money. Again, not to belabor
the point, but the points that are being referenced around this
table — make it affordable and when you buy insurance — when I
buy car insurance, I want it to be there even when my daughter
runs into a post.
And you know what? It's been there. And I want the same re-
sults from Federal crop insurance. If I pay the money for the buy-
up provision, I want it to be there when I need it. I recognize that
the 50 percent coverage ought to create peace of mind and I think
it does. But I think our job and, again, your job is to, again, make
it actuarially sound, whatever that might be.
To provide that incentive for buy-up is probably the key critical
thing and using the yields that we've established on our individual
108
farms as opposed to county averages. I commend the administra-
tion for recognizing that. I find it difficult to tear this proposal
apart. I think it's probably 98 percent sound.
Again, it certainly has something to do with how much money
that you're going to be able to garner to put it together. Thank you.
Mr. MiNGE. Thank you.
Mr. Johnson. I want to thank the members of the panel. I think
their discussion and their response to the questions has been excel-
lent and will be a real benefit to the members of this committee.
So thank you.
We will call now the third panel. That panel is comprised of Mr.
Mike Crowley, who is with the Crop Agency, Inc. of Worthington,
Minnesota; a special welcome to Mr. Don Marin, who is with
Marin/Biel Insurance, Inc. of Selby, South Dakota, a constituent of
mine; Mr. Steve Lindholm, president of F&M State Bank/F&M In-
surance Agency of Clarkfield, Minnesota; and, Mr. Eugene
Smestad, branch manager/insurance director. Farm Credit Services
of Fargo, Valley City, North Dakota.
We'll proceed in order, going through the panel, and only then
going to questions from the committee. We'll begin with Mr. Crow-
ley.
STATEMENT OF MIKE CROWLEY, AGENT CROP AGENCY, INC.
Mr. Crowley. I'd like to thank the chairman and Congressman
Johnson and the rest of the committee for this opportunity today
to speak here. I've been an agent in Nobles County, Worthington
area, for the past several years.
The crop insurance offers our farmers the opportunity to protect
themselves from financial disaster. The existing program does need
some changes and that's why we are here today.
As we look at the existing program in our area, the APH's pro-
gram has worked fairly well. The problem is then that we've had
a number of years, 1988 and 1993, for example, as catastrophe
years. When those two years are figured into the APH's calcula-
tions, the farmer's ability to insure at an adequate level is reduced.
A key factor for the program to work for the farmer is that it be
set up so that an adequate amount of protection can be purchased.
Due to bad weather conditions, the farmer may be placed in a high
loss situation which he has no control over. The farmer certainly
does not choose the bad weather and the loss has nothing to do
with his farming practices.
I would like to see the catastrophe years removed from the 1.1
loss ratio that is being calculated. If a farmer goes over the 1.1 loss
ratio today, he is subject to the non-standard classification. This re-
sults in a higher cost to him.
In the past few years, we have seen a lot of changes in the farm
sizes. One farmer increases his number of acres, another decreases
his, another one quits all together. This presents another problem
for the crop insurance program, that there's problems with existing
new farmers and the beginning farmer. The new farmer, in increas-
ing his operation, is limited to the T-yield factor. I'd like to see this
T-5deld factor removed from the calculation, replaced with a
straight ASCS yield.
109
This should apply for a 2 to 3-year period, allowing the farmer
to have adequate protection until he can improve his normal yield
up to a limit that he should be insured at. The program should
allow the new land brought into the program to a little flexibility
to be insured at the level three in order to build up an appropriate
year of protection.
I have several concerns about the new proposed program, as has
been discussed much earlier here about the 50 percent coverage
and the cost. I believe the 50 percent coverage could be a false
sense of security to a farmer out there if they do not buy these ad-
ditional buy-ups. With the additional buy-ups on there, I don't
know how exactly they would work as far as cost and things like
this.
As discussed earlier here, just putting additional money in there,
I agree with that very much. But at the 50 percent level, I beUeve
this could be a false sense of security to the farmer and he may
not purchase the buy-ups that are available.
This program also has a dual delivery system, which concerns me
as far as cost and it may be confusing to the farmer. Under the cur-
rent system, a farmer pays for his coverage on a subsidized basis,
which is being proposed to use the disaster dollars now to give ad-
ditional coverage. It seems that it makes sense to take these cur-
rent dollars, disaster dollars, to move into our new protection pro-
gram.
I'd like to see the subsidies on the other programs brought up to
the 75 percent level so the farmer can insure at a higher proper
rate and have the proper protection he needs.
I believe the producers in our area would rather have a higher
level of coverage at a fair rate. If we could get more producers to
purchase the 75 percent level of coverage with higher subsidies, I
believe we can make this program more cost-effective for the farm-
er and the government.
The farmer will receive a higher level of coverage. To make this
actuarially sound, we would need to have every farmer participate
in the crop insurance program. With every producer using crop in-
surance, all additional disaster programs would be eliminated.
In summary, what I really feel we need to accomplish with the
crop insurance the increase of guarantees and the use of subsidized
dollars to improve the current program. Today's farmer is wiUing
to pay his fair share if he is getting adequate protection. He doesn't
want a free program that still leaves him with a great deal of un-
certainty.
He deals with uncertainty every day when he checks the weath-
er. We need to provide these valuable business people with guaran-
teed protection at a reasonable premium with a workable system.
I ask for your support in creating not another Federal bureauc-
racy, but to increase the present program that we have. This will
help the farmer and all the U.S. citizens that we have. I'd like to
thank you for allowing me to speak to you today on this very im-
portant issue.
[The prepared statement of Mr. Crowley appears at the conclu-
sion of the hearing.]
Mr. Johnson. Thank you, Mr. Crowley. Mr. Marin.
110
STATEMENT OF DONALD R. MARIN, AGENT AND OWNER,
MARIN-BIEL INSURANCE, INC., ON BEHALF OF THE NA-
TIONAL ASSOCIATION OF PROFESSIONAL INSURANCE
AGENTS
Mr. Marin. Thank you, Chairman Johnson and members of the
subcommittee. It's a pleasure for me to be here to testify before you
today. My name is Don Marin and I'm an independent and co-
owner of a small agency in Selby, South Dakota. I've been in the
crop business for over 13 years.
I'm here today representing the National Association of Profes-
sional Insurance Agents. We serve some 180,000-plus agents across
the United States of America and virtually all of them are involved
in multiple lines of insurance coverage, some 65,000 of them being
in multiperil crop insurance.
We want to commend the subcommittee and we want to com-
mend Secretary Espy for seeing fit to come up with a reform pro-
posal which has been badly needed for many years. I just want to
touch basically on the 14 points, and 2 or 3 of them I'm going to
highlight a little more, that Chairman Johnson asked that we
touch base on.
The catastrophic level is probably better than no coverage at all.
But as we've heard testified on the prior panel, it just does not cut
it. It does not meet the farmer's needs in virtually all cir-
cumstances. As far as the $50 processing fee, I don't know that
that covers the cost of paperwork. After hearing some of the per
acre, if they are nominal per acre charges, I think that we would
support that concept even maybe more so than the processing fee
of so many dollars per crop per county, especially with maximums
put on.
I share some of the same concerns as some of the farmers that
they addressed earlier here. On the requirement that producers ob-
tain catastrophic coverage, I think it has to be tied in in order for
this program to succeed. On the dual delivery system, this is near
and dear to our hearts, of course, I did recommend to Secretary
Espy, at the meeting that we had with him, and he seemed to favor
the idea. It did not get into the proposal somehow. That was that
the farmer first go to the independent agent to get a total overall
picture of what the cost would be of the entire program for every
level of coverage to that farmer, get a certificate.
If he elected not to buy any level of coverage from the agent or
just wanted to get the catastrophic level from the FSA, he could
take that certificate to his FSA office and do so. This the Secretary
seemed to be very receptive to. Somehow it did not get in the pro-
gram, not into the bill as submitted. I'm not sure why.
On the use of actual production history for four years, we have
a little bit of a problem there. Brand new producers that have been
farming before, when they get cut 65 percent of their T-yield be-
cause they can't come up with actual production history, it's not an
incentive for them to get involved in the program. And we do need
participation.
On the requirement for producers to insure all land in the coun-
ty, that would be no change from what we have and I think we
need to continue that.
Ill
On the provision for noninsured crops, we do need a subsidy for
those that aren't available to buy crop insurance through the FCIC.
On the amount of premium subsidy levels, I want to hit a little
hard on this. As we've heard over and over and over again today,
that we need higher levels of coverage — subsidies for the higher
levels of coverage in order to make the farmer a better cash flow
situation for his farming operation and a total better management
program for himself.
In my written report, I have even recommended dropping the
CAT level as low as 25 to 35 percent and putting more coverage
of the subsidy dollars from the 50 percent level into the higher lev-
els. I was not aware until today that they were looking at taking
some of the subsidy of the 65 percent for more of the higher levels
of coverage. I was not aware of that.
But hearing the testimony today, I'm not so sure we shouldn't
eliminate the catastrophic coverage entirely, fully subsidize limits
of what we hear the farmers saying they need, 65, 75, 85 on up
or whatever, and subsidize them greater and forget the CAT level.
That might be something that we should take a look at.
On the expense reimbursement formula for the private insurance
companies, on the average, it cost an insurance company 25 to 35
percent to do business, just their expense factor. The 31 percent
that is now currently being reimbursed to the companies for han-
dling this, the private companies, I don't think we can afford to cut
any more or we're going to jeopardize the financial soundness of
some of these companies, I feel.
On the provision to allow insurance companies to lower the rates
charged to producers, while we advocate cost through market
forces, I don't think this will work. The principal may look good,
but in the long run it could limit competition in the marketplace,
to the disadvantage of smaller companies. Selective marketing and
cherry-picking could easily result, and we don't want that.
In summary, I would just say, in conclusion, our major concern
at this time is to get the crop insurance program adequately fund-
ed. We believe the program is designed first and foremost to pro-
tect the American farmer. Farmers participating in the program
enhance the stability of the economy in their given agricultural
area.
We also believe that major improvements to the Federal insur-
ance program have been possible because of the private insurance
industry and the FCIC agencies to work together. We continue to
stand ready with Congress and the U.S. Department of Agriculture
and any other agencies necessary to protect the stability of our
local and national economy.
Mr. Chairman, we need your help. We support the crop insur-
ance program. While it isn't perfect, it does work. Thank you.
[The prepared statement of Mr. Marin appears at the conclusion
of the hearing.]
Mr. Johnson. Thank you, Don. Mr. Lindholm.
STATEMENl OF STEVE LINDHOLM, PRESmENT, FARMERS &
MERCHANTS STATE BANK OF CLARKFIELD, CLARKFEELD, MN
Mr. Lindholm. Thank you, Mr. Chairman. I am really happy to
be here and really pleased that Congressman Minge saw to it to
112
bring this session here to the part of the country where it really
makes a big difference.
I would echo Dave Frederickson's thank you regarding the 1993
disaster. It was essential to my customers. Really it holds primary
responsibility for the fact that we were able to finance most cus-
tomers for 1994. So we do appreciate that.
I am President of a bank and we do business primarily with
farmers. We also have an insurance agency that sells crop insur-
ance. I support the administration's crop insurance proposal, the
Federal Crop Insurance Act of 1994. I believe it is essential that
the House and Senate Budget Conference Committee adopt the Ad-
ministration's recommendation to transfer $1 billion to budget for
crop insurance reform.
Inadequate funding of crop insurance reform would be a case of
killing the goose that lays the golden egg, in my opinion. There is
a direct relationship between a sound crop insurance program and
the availability of plentiful, low-cost food for the American public.
The ability to insure crops is fundamental to farmers' ability to ob-
tain substantial credit necessary to grow and harvest crops that
are vulnerable to natural disaster.
Please carefully consider all suggestions. I know you are. I'd like
to comment, also specifically, like Don did, on some of your ques-
tions. I'll probably skip over some that I feel have been covered
quite well.
As far as the adequacy of catastrophic coverage, I also believe
that every effort should be made to provide counseling and incen-
tive to buy-up the coverage. It is simply not adequate for most
farmers.
I would say that the dual delivery — that ties right into the dual
delivery system. I think that private agents are in a much better
position to counsel people on what coverages are needed. I think
there needs to be an education process that takes place that the
Government is not in a position to provide, private agents are in
a position to provide.
I think that ASC is having difficulty administering the programs
it already has. It's being cut back on personnel and it has an in-
creasing workload. I think there's a duplication of services that
would take place since we already have a private system in place.
My recommendation is that we use government offices to issue
crop insurance. Those Cjovemment offices that issue crop insurance
should be limited to areas where they don't have insurance agents.
My understanding is there are some areas who don't. That's not
the case here. But if there is some way to make it available only
in areas — through the Government offices, only in areas where
they don't have private agents.
Regarding actual production history, it should be used whenever
possible. However, T-3delds, I feel, are simply too great of a dis-
count to encourage participation. It puts beginning farmers, farm-
ers who are taking on new land, and livestock producers at a dis-
advantage.
The T-yield is actually — I did a calculation. If you took the T-
yield, not the — I think that we could go with the ASC yield. That's
already lower than what my customers produce. Average corn yield
in Madison County in an average year is probably 110 to 115 bush-
113
els. That's probably fairly conservative. The ASC yield is probably
92, 93 bushels and a T-yield would be 85 percent of that.
Well, if you take level 2 coverage and you have no history, really,
at level 2, the 65 percent level, you're getting 40 percent coverage,
not 65 percent coverage.
And I don't think you can cheat the program. It's simply too ex-
pensive. Your investment in equipment and inputs and so on, even
if you did the minimum farming practices, you still couldn't profit
by using crop insurance.
There are situations where buy-up coverage may be inadequate.
Beginning farmers who are highly leveraged and — also, the pro-
posal allows up to 85 percent coverage. I would like to see that
used. I hope the FCIC will give farmers the opportunity to buy
higher coverage at an affordable cost.
Also, today, farmers have more coverage than they would under
the proposal because of the combination of crop insurance and dis-
aster payments. I believe that private industry could supply a sup-
plement to their policies that would provide for an increasing pay-
ment at a relatively low cost, if the FCIC would reinsure that pro-
vision.
The amount of premium subsidy at the different levels. In Yellow
Medicine County, it costs between $6 and $7 an acre to insure com
at level 2 coverage and it costs about $14 an acre to insure com
at level 3 coverage. Mr. Ackerman mentioned that at level 2, the
premiums would go down by about 16 percent possibly and, in level
3, the premiums go down about 8 percent. I don't believe that
change — ^you won't get — it's simply too costly to go up to the 75 per-
cent level even at those subsidy levels.
I think that farmers are satisfied at the level 2 with what they're
paying. I believe if somehow you could — if they could pay the same
premium at level 2 and take all as much subsidy as possible, if you
get that premium down around the ten dollar area, you start get-
ting participation at the level 3 area. If you're not around that $10
dollar area, I think you're going to have the same as in the past.
It's £dl going to be at level 2 or virtually all coverage will be at level
2.
The adequacy of the expense formula for private companies. I
think the program needs to be simplified for the expense formula
to be adequate. Whatever administrative shortcuts can take place
would be critical.
I guess my time is up here. I hear comments from Washington
and at home that the crop insurance program is not working very
well. I do not share that view. I think it works relatively well, but
can be improved in terms of increased available coverage and re-
ducing administrative costs.
It would be very wrong, in my opinion, to think of crop insurance
subsidies as a give-away program. I believe the amount by which
crop insurance program costs exceed premiums paid represents a
very small investment of tax dollars for a very substantial return.
Thank you for inviting me here.
[The prepared statement of Steve Lindholm appears at the con-
clusion of the hearing.]
Mr. Johnson. Thank you, Mr. Lindholm. Finally, Mr. Smestad.
114
STATEMENT OF EUGENE C. SMESTAD, BRANCH MANAGER/IN-
SURANCE DIRECTOR, FARM CREDIT SERVICES OF FARGO,
VALLEY CITY, ND
Mr. Smestad. Chairman Johnson, Congressman, thank you for
being here today. My name is Gene Smestad and my remarks will
be representing Farm Credit Services. I am going to highlight a
part of the written testimony that you have before you. I will bullet
in on some of the key issues that we think are areas of concern.
One, dual delivery system. History clearly demonstrates the in-
ability to lace marketing and servicing incentives into a govern-
mental delivery system. Only private agents will have the incentive
to provide the product counseling necessary to assure good risk
management participation.
Additionally, when the agent's personal success is based upon
farmer participation, there will exist an automatic incentive to im-
prove product value so that the sales materialize. Greater partici-
pation is an expectation of this reform and increasing product
value is the only path toward increased participation.
Efforts should be made to increase the industry's role and re-
sponsibility in the delivery and marketing system rather than pay
the Government to come back in as a player.
Two, the group risk plan. This is clearly another attempt to pro-
vide something less than value to save budget. All of us buy insur-
ance and we buy individual coverage to match our risk manage-
ment needs. The present APH approach provides for individual cov-
erage which can be measured in specific dollars of protection.
GRP cannot be measured until the year is over. It can be a bonus
or a ticket out of farming. It is a dangerous option to promote if
we are truly concerned about protecting risk management insur-
ance to farmers.
The implication of not having individual coverage will shrink
some operators' credit limit with their respective lender. Buying a
product which provides no measurable protection value is like
shooting craps. It simply does not reconcile with sound business
judgment.
Under a dual delivery system, I wonder what incentive an ASCS
office employee would truly have to evaluate this option with a
farmer.
Three, the APH calculation. This is a good approach to individual
protection and the 1994 enhancement was good to see. However,
further enhancements would increase product value. Enhancement
one would be to limit catastrophic loss years to either the T-3deld
or an ASCS yield. Enhancement two would be to keep that cata-
strophic loss from the rate base data.
The purpose of these two enhancements would be to protect prod-
uct value or prevent product value deterioration and prevent in-
creased product price. Without these enhancements, it is doubtful
that product value will increase to the desired levels. A farmer can
by $100 of hail coverage per acre, incur a total loss, and the next
year he can again buy $100 of protection.
However, with MPCI, the total loss will diminish the amount of
insurance coverage he can purchase the following year. This identi-
fies a product deficiency, as his expenses and risk protection needs
will not diminish.
115
Four, the cheaper theory. Proponents of this reform are saying
that the additional insurance the farmer buys above what I call the
"something-for-nothing" line could be less expensive as a result of
more participation. This is doubtful. We must increase product
value to get participation. We heard that as a common theme for
the first group that was up here today.
Product value will have added price if it is to be actuarially
sound. Let's get away from believing we can sell a poor product just
because it's cheap. History proves this is not possible. Instead, let's
improve the product and price it according to value. Farmers are
very large buyers of value products. They will make good business
decisions if the product options are available.
Five, adverse selection is thought to be a function of, and I quote,
"knowing disaster legislation will be available." As a farm owner
who buys MPCI and as a lender who sets up farm operating lines
of credit, I see adverse selection as a direct function of perceived
product value. That is why participation varies by crop and geo-
graphic area. If product value is increased, the size of the risk pool
will increase and adverse selection will decrease.
Six, the role of FCIC. Simply stated, they must not be a road-
block to private industry's attempt to develop and market products
of increased value. Allowing them to establish a presence at the
county level, as proposed, would be a mistake. This would be build-
ing another cost structure that would defer dollars away from en-
hancing product value.
FCIC must move faster in both approving and reinsuring added
products so as to be a more accommodating player in program en-
hancements. Private industry needs this type of cooperation if re-
form expectations are to be accomplished.
In conclusion, we're, again, standing at the gate of opportunity
in regards to improving this risk management tool for agriculture.
If this reform gets caught up strictly in the emotion of cutting
costs, it will fail everyone. The focus must be to bring business
principals to an enhanced risk management product which can
measurably protect production agriculture.
If we promote a single delivery system by private enterprise, if
we promote the development of products with true and measurable
value, if we enhance the APH formula to limit product value dete-
rioration and if we promote an American free enterprise spirit to
the above process, we may have a chance at achieving reform ex-
pectations.
Grood luck in your continued efforts and it's been my pleasure.
[The prepared statement of Mr. Smestad appears at the conclu-
sion of the hearing.]
Mr. Johnson. Thank you to all the members of this panel.
Again, I think your insights are very helpful to us. Mr. Crowley,
in your area, do you have any idea what level of crop insurance
sign-up you have in the area that you serve?
Mr. Crowley. We'd be in the area of the upper 70 percent area.
Mr. Johnson. Is that just in a disaster year or year-in/year-out,
you do continue to have sign-up at that level?
Mr. Crowley. It's year-in/year-out. There are farmers who have
followed the program quite closely £ind stayed with it on a consist-
ent basis.
116
Mr. Johnson. So you're in an area where the history is that crop
insurance has been relatively popular.
Mr. Crowley. Yes. We're more the exception to the rule than the
rule as far as the numbers are concerned.
Mr. Johnson. I appreciate your observations about APH and
some of the challenges we have relative to new land and changing
farm methods and repeat disaster years and so on. I think your in-
sights are very helpful.
Mr. Marin, part of the theory of the crop insurance reform is that
there is going to be increasing competition among crop insurance
companies. Do you think that is, in fact, going to occur? How com-
petitive out there is the sale of crop insurance going to be, do you
think? Are companies going to be out there competing vigorously
or is this not that helpful?
Mr. Marin. I think, Tim, to answer your question, the competi-
tion factor is out there. There are many, many companies vying for
the business, to add to their portfolio of products that they can give
to their agents to sell. The fear that I have is if we go to cost-cut-
ting. If the company can do it for a less amount, they will pass that
saving on to the farmer.
As I mentioned, it looks good in theory, but it seems like always
someone comes up that, well, we'll lose money a little bit to get the
majority of the business. We'll wind up with limited competition,
which is not good for the farmer, it's not good for the agent, it's not
good for the program. I think we need to keep that reimbursement
at an adequate, but not over level, and I don't think we dare go
much below this 31 percent in order to keep it that adequate.
But the competition is there, Tim. We've just got to be careful
how we use it.
Mr. Johnson. Thank you, Don. Mr. Lindholm, do you require
borrowers to take out crop insurance or is it on a case-by-case basis
that you make that determination as a lender?
Mr. Lindholm. Well, we look at the map. It takes about, in our
county, approximately $240 an acre to raise an acre of com. At
level 2 coverage, it will vary, of course, among customers, depend-
ing on what their actual production history is. But they'll be within
$70 to $80 short of covering their costs.
So we multiply whatever that shortfall is, the difference between
their crop insurance protection and what it costs them to raise the
crop, and multiply that times the number of acres and then we
know what their potential loss could be in the event of a disaster.
We compare that to the reserves the customer has.
If they have sufficient reserves to cover a disaster without crop
insurance, we don't require it. If they don't have sufficient reserves
to cover, then we do require it.
Mr. Johnson. If your borrowers are getting free catastrophic cov-
erage, in effect, I would assume that for many of them there are
some significant savings, financial savings, that they can then use
to buy up coverage, that they would have greater ability to buy up
coverage than they would have had in the past. Would that not be
true?
Mr. Lindholm. I had some estimates done — I think the average
premium cost in Yellow Medicine County at level 2 is about $6.70.
With the 16 percent potential reduction in premium cost under the
117
program's proposal, that would bring it down to $6.20 or something
like that.
So there is some savings there. The real savings would be if they
didn't carry it at all. But the fact is that very few can get along
without higher coverage than the catastrophic level.
So there's a small savings and it's my opinion that they would
still pay that $6.70 if it would be helpful to get a lower cost on that
$14 coverage. It's just no way that you're going to get a lot of peo-
ple who would love to have 75 percent coverage, but they're not
going to double their premium to do it.
Mr. Johnson. Mr. Smestad, I gather there isn't much in the re-
form proposal that you like at all.
Mr. Smestad. I don't want you to take it that way. The issues
that I brought up are issues of concern and the one theme is prod-
uct value, because if it's going to work, we have to increase that
which we presently have. Thirty percent or 33 percent of the acres
are insured. There's a message in there. Some say the message is
that people rely on a disaster program taking place. Some of us do
not buy into that. Some of us say that the product value is not
there.
When you asked the question whether we require our borrowers
to carry that coverage, it is a case-by-case basis not only on their
cash flow, but on what their yields are. Some individuals have
yields that are so far superior to what this coverage can offer them
that we presently have and if our buy-up in this reform is going
to be similar to where we are today, getting to that 80 percent is
just going to be a Martin Luther King dream. We're not going to
get there.
There has to be a product of value there before a good operator
will buy it. In the 1989 hearings, that was a common theme
throughout the country. People asked for more product value. In
the first group up here today, they concluded with that same
theme, that we have to have more of a product.
So I'm not against the reform. I think it's the path, the gateway
to an opportunity to do something, but if the emotion of cross-cut-
ting is going to override it, then I'm real concerned that we'll
achieve it.
Mr. Johnson. Understanding that, obviously, we have a finite
fiscal pie to deal with. In fact, there are a great many people in
Washington right now in the Senate and in the House who don't
want us to have even this amount of money for crop insurance and
who resent spending nickel one to subsidize any sector of the econ-
omy.
So we have that challenge ahead of us. One good point, I think,
raised on this panel that I think has been neglected by myself a
bit is that while we've talked about the shortcomings of crop disas-
ter programs and how ad hoc crop disaster programs should not be
the strategy of the future.
Nonetheless, I think it has been well pointed out that those pro-
grams were criticsdly important in recent years across much of our
part of the country. I know that Mr. Peterson and Mr. Minge, as
well as many others from our part of the country, worked very
hard to come up with the crop disaster programs that we had.
Given the circumstances that we had, I think they were essential.
118
They had their shortcomings and their faiUngs, but given the
overall environment, they were essential. So we shouldn't trash
those past efforts too badly. There are a lot of people who are still
farming today because of the benefits of those programs.
The question now, however, is that approach is probably not sus-
tainable into the future and what new strategies are we going to
be able to adopt in order to provide a more efficient, more predict-
able, less political risk management tool for individual producers,
and that's the challenge that we have.
So that's not to say that our efforts on disaster programs in the
past were all bad. I think they were essential in many ways.
Mr. Peterson.
Mr. Peterson of Minnesota. Thank you, Mr. Chairman. I don't
want to dwell on this too much, but this discussion I had with the
previous panel in terms of the catastrophic end of things, I would
like your opinion on what you think about that.
I sense that, if I listened to one of you at least correctly, you'd
just as soon maybe say we don't even need the catastrophic level
and we should put the whole thing into the higher coverage, which
I may agree with. But I think politically we almost have to put it
there so we say that we've got some coverage so we c£in avoid dis-
aster bills.
Mr. Marin. Yes. I guess I was the one that mentioned that. I
think that the responsibility lies with us all to be prudent business
people, and our farmers are prudent business people. Every one of
them I know of up in our area does not want anything for nothing.
I think if we give them an adequate buy-up coverage, they wouldn't
even look at the CAT coverage.
I agree with my friend to the left over here at the far end of the
table that the product has to be — if it's a good enough product, the
farmer will buy it to better manage his operation. So I really do
believe that that could be eliminated if the funding was good
enough with the high enough levels.
Mr. Peterson of Minnesota. I think there's no question that
that's a big problem with the program. It's that it's just not a good
business decision to buy this stuff. How you get there is the ques-
tion.
Southerners have had a pretty good situation. They've had all
the committee chairmen and they've been getting coverage without
paying for it for years. If they can continue that kind of a program,
I think that's what they're going to opt for.
It's one thing to talk about what we here in the Midwest thinks
makes sense, but when you get to California and you get to the
South, they've sometimes got some different ideas. They've been
taken care of very well without having to pay an3rthing. So that's
one of our challenges, trying to figure out how we get everybody
into the tent.
Do you think, those of you that sell insurance, that it's going to
drive anybody out of the system if we charged them so much an
acre rather than that $50 fee per crop — whatever the number
would be? Do you think that would make a whole lot of difference?
It would probably make more difference what's on the top end, I
hear you sa3dng.
119
Mr. Crowley. Yes. Our concern on that 50 percent catastrophe
level there is that a lot of farmers may just take that and we could
have a year like we did last year and that would not be adequate
coverage. Therefore, there would be more pressure put on Congress
to bring out a new disaster program.
The buy-ups, I think, would be more beneficial to the farmers as
long as they were priced reasonably and we put our subsidies in
that particular area. The cost of that $50 fee per crop or $100 per
county is not, in my opinion or a lot of people's opinion, probably
fair where we have a 160-acre farmer versus a large farmer. I
think each farmer wants to pay his own fair share. But I think
some consideration needs to be given on this fee for those acres.
Mr. Peterson of Minnesota. If I could just make a comment. I
guess I'm interested because of my background. They say the only
people that are more boring than CPA's, which I am, are actuaries.
I don't know if that's true or not. But, anyway, I would be inter-
ested in having some information about what this looks like if we
go to a system like Mr. Smestad has been talking about here,
where we allow people to buy the coverage based on what they've
actually produced, and then what the actuarial numbers look like
in order to make that happen without any Government subsidy.
Do we have that information? I guess I'm just saying to you I'd
like, in addition to this other information I asked for, I'd like you
to make that available in more detail, at least to me, because I'd
be interested in taking a look at that, because I think that really
is the crux of the problem.
Some of us that are going to have to make these decisions, I
think, are going to have to understand the actuarial aspects of this
in order to be able to figure out whether it makes sense or not. It's
pretty complicated stuff. But I, for one at least, would like to try
to take a shot at it and try to understand this better.
So when we get back, if we could do that, I'd appreciate it.
Mr. ACKERMAN. We can provide that kind of information. We can
run those numbers on a couple of different sets of assumptions, so
you can see what they look like.
Mr. Peterson of Minnesota. Thank you. Thank you, Mr. Chair-
man.
Mr. Johnson. Mr. Minge.
Mr. Minge. I just have a couple of questions. Several of you have
talked about value, particularly the question of having a value pol-
icy or value product to sell. If the product is being subsidized by
the Federal Government to the extent that we've talked about, this
product is a much better investment of money than anything that
one could do by going to a casino.
The odds are stacked in favor of the farmer when you have a
subsidy that not only covers the underwriting costs and the admin-
istration costs of the program, but, in addition, has a fairly sub-
stantial subsidy on the premium.
I'm wondering if the policy terms are written so that they cover
the losses in an adequate way and if the premium then reflects the
cost of that tjrpe of a policy, because the better coverage you have,
obviously, the higher the premium has to be, and then if that pre-
mium is discounted to the extent of the Government subsidy, do
you think farmers are actually willing to purchase up to the 75 or
120
85 percent level? Because you're really talking about a pretty sub-
stantial premium there for a good quality policy,
Mr. Crowley, I pose that question to you.
Mr. Crowley. Yes. I think the farmers in our area have shown
that in the past that they will purchase this crop insurance. But
if we can get those levels up there at the 75 and this 85 percent
level and the rating system is adequate, I do believe they will pur-
chase this, providing that we're not coming back with disaster-tjrpe
programs all the time.
This is always a problem of a person making the decision of buy-
ing the crop insurance because he feels that Uncle Sam basically
is going to come back in and help him out in a year of a catas-
trophe.
So we have to eliminate that first, I feel, and get the coverages
up there and make sure that they're at an adequate level. The
farmers, I do believe, will buy this and we'll have enough farmers
in the program to make it actuarially sound.
Mr. MiNGE. I'd like to follow up with another question. We have
some counties in Minnesota which are receiving back in terms of
program payments approximately 35 cents for every dollar they
pay in, and one of them is very close to your home. It's over in
Jackson County.
We have other counties in Minnesota that are receiving back
more than a dollar for every dollar they pay in, and we have entire
States in the South that receive back like $2.50 for every dollar
they pay in. So we have quite a disparity in the program not only
within a State, but across the Nation.
Have you seen in your area, and, Mr. Crowley, I'm most familiar
with the rates in the Nobles and Jackson Counties area, a reluc-
tance to purchase crop insurance because of concern that the bene-
fits coming back in are significantly less than the payments that
are going out?
Mr. Crowley. Yes, there are some problems in there. One of
them is when they purchase the crop insurance, most of them stay
at that level 2 coverage because of the pajonent limitations that we
run into against the disaster program. There has been a cap put
on that. So in many cases, the farmer has not purchased the higher
level of coverage for the fear of running into this cap that they
have. So it limits them on the amount of money that's been avail-
able.
So he pays a premium throughout these years and when a disas-
ter does come along, this money is made available to everyone,
whether they have crop insurance or not, although there are dif-
ferent percentages for an individual with insurance and without.
But there, again, the farmer that has insurance is limited on the
amount of money that is available to him on that.
Mr. MiNGE. We've had questions raised about the administration
of the crop insurance program in a time of loss, like we experienced
in 1993. Mr. Marin, I'd like to ask you if you've seen problems the
way different crop insurance agents £ind companies are handling
claims and if that's given rise to a certain awkward situation and,
if so, how you think we could improve the administration of the
program to avoid that.
121
Mr. Marin. I don't know that we really need to change it at all,
Representative Minge. You could send 40 adjusters out there. They
could be all Government adjusters or they could be 40 different pri-
vate companies or they could be a mix of each, and you're probably
not going to get two of them to come up with the exact same kernel
count and figure and determination of exactly what's left standing
there.
The way in which it's handled now in our agency, every year for
the last 3 or 4 years, we get spot checked. We get files pulled on
us and they're checked, loss files pulled on the adequacy of the in-
formation, the farmer is gone out and checked on, and, fortunately,
we've always been all in line and everything and never had any
problem.
So if there are problems, like Mr. Ackerman alluded to, and per-
secution takes effect, which it well should, I don't see any problem
with the way we're doing it right now.
Mr. MiNGE. Thank you. I see my time is up.
Mr. Johnson. Any further questions, Mr. Peterson.
Mr. Peterson of Minnesota. No.
Mr. Johnson. Mr. Minge, do you have any?
Mr. Minge. Again, I would just like to thank the panel. I think
that you made excellent presentations. It's very helpful to hear
from you. Mr. Lindholm, were you going to add a comment?
Mr. Lindholm. Could I make one more comment here?
Mr. Minge. Yes.
Mr. Lindholm. I always look at the statistics. From 1980 to 1989
in Minnesota, for com, for every dollar premium paid in, only 55
cents of losses were paid. On soybeans for the period of 1980 to
1989, only 64 cents of loss payments were made for every dollar of
premium paid in. Sugar beets was 82 cents and wheat was $1.16.
So for that 10-year period, wheat was the only crop where the
losses exceed premiums paid in.
Of course, that statistic is much higher now because of the last
couple of years. I think it's at 137 percent overall for the period of
1980 to 1993. However, I think over a long period of time, the Mid-
west really does show some pretty good actuarial numbers, and you
pointed that out. There are some inequities between where we live
and other parts of the country.
Is there any way that there could be some underwriting matters
addressed to make that more equitable?
Mr. Minge. I do know that between the Agriculture Committee,
the Appropriations Committee, and then in consultation with the
FCIC, there is a concerted effort to try to redress that inequity. So
hopefully we'll see improvements in those ratios.
Mr. Smestad. Congressman, one last statement. We've been dis-
cussing Plan A this morning. Plan A is funding of $1.9 billion to
make this proposed reform work. All of us here are grateful that
you're in support of this direction. But let's say we don't achieve
plan A.
In the discussion of whatever plan B may be, there will be pro-
posals that will say let's save money by eliminating units, let's save
money by expanding the GRP concept, and let's save money in
those types of areas. What we'll end up with is less of a product,
again, and we won't achieve any of these expectations of reform.
122
So whatever we get — if we should fail with plan A and get to
plan B, we'll have to draw a line in the sand sind label product
value as being the important thing to maintain and then maybe
scrapping the free disaster or catastrophic level and some of those
type of things to build that value.
Mr. Johnson. I agree that if we come in with less than the $1.9
billion, we're going to have to lay out a menu of policy options that
would be available to us, with the understanding that if we get too
far below that, we may just see the viability of reform destroyed
all together.
I would suggest that there are a great many people on and off
the Agriculture Committee who would be very reluctant to create
a legislative prohibition on future crop disaster programs, ad hoc,
if catastrophic coverage is lost. I think that may be part of the po-
litical dynamic. If you're going to trade off the ability to do crop dis-
aster programs in the future, they're going to be very reluctant to
give up very much on the catastrophic coverage.
So it's a fine balancing act that goes on here. The best answer,
of course, is to have the administration's recommendation on the
full $1.9 billion, which still says it's the taxpayers' money, by the
way, over 5 years, but does give us at least the resources to signifi-
cantly enhance our crop insurance program.
So thank you, again, to members of this panel. We are very ap-
preciative of your insights. We'll go now to an open mike portion
of the hearing. There are six individuals who have thus far ex-
pressed an interest in expressing comments to the committee for
the record.
It would be helpful if you would come down to the witness table
to use the mike so that everybody can hear you. You must fill out
our witness card pursuant to Ag Committee rules, and it's provided
by the staff.
We will have to follow the 5-minute rule. When you begin to talk,
the green light will be on. When it goes to red, it will be important
for you to wrap up your comment. Otherwise, we won't have time
for everybody who wants to speak.
So we have six individuals. I will simply call them in the order
that they signed up and see if they're still interested in expressing
their views. The first would be Mr. John Keister. Is Mr. Keister
here? Here we go. If you would come down and use the mike by
the witness table, that would be very helpful. You can stand or sit
or whatever you're most comfortable with.
STATEMENT OF JOHN KEISTER, BLUE EARTH, MN
Mr. Keister Mr. Chairman, members of the committee, I'd like
to express my strong support for the program, first of all. I'm going
to leave you a copy of written testimony and I will summarize.
You are asking for comments that could strengthen the program.
My first comment would be to appoint a permanent manager ver-
sus a political appointee. My comments here have no bearing on
Mr. Ackerman, but there has been quite a window of rollover the
last 15 years of Manager and I believe that this has added a lot
of problems with continuity in the program and decisions have
been made or put off.
123
I believe that the relationship between the companies, the Grov-
emment and the farmer would be better served if there wasn't
such a revolving door at the top. A case in point of this is the deci-
sions that were made or not made on the 1993 coarse grain quality
adjustment procedure.
My second recommendation would be instead of a dollar amount
coverage, you simply let the price per bushel float. Instead of using
a market price election under our current system, where you're al-
lowing both collection under Federal crop insurance and ad hoc dis-
aster, in effect, that's what you're doing anjrway.
The farmer needs coverage that is higher than the $2.40 com
election would allow. Why can't he choose a $3 election? That $3
election does not change the probability of loss. There are numer-
ous adjustment procedures out there that can guard against abuse
in the system. That is the biggest single comment that is against
that, is abuse in the system. My point is that it's already there be-
cause he's collecting the $2.40 and the disaster anyway.
The third recommendation would be to expand actuarial — first of
all, to change actuarial to rely on true rating in a given area. The
gentleman here at the end of the table led into this. I'm not exactly
sure. It's been a year since I've seen the figures. But in the north-
em com belt, it seems to me that com was overpriced by 25 per-
cent.
If the true premiums in true areas were given, then maybe some
of these problems of trying to grow dry land corn in west Texas
won't happen. They're simply going to have to pay the rate that's
down there.
The other portion of that is the actuarial division can expand
their reinsurance portfolio. I believe that the actuarial division has
a lot of expertise in it. The world market reinsurance because of
the hurricanes, floods and what have you has left a tremendous
dent in that availability of reinsurance and there has not been a
consistent market for the companies to go to.
If that would be expanded, that alone, bringing out new pro-
grams, would add tremendous competition in the industry. And
what the heck, the Government might even make a buck or two on
the end of it.
The last thing I have is a comment. It seems to me that the
farmers whose organizations object to a mandatory program — I be-
lieve it is already mandatory. That comes in that it is mandatory
for you to pass the bill if it happens by their political pressure. I
think that your time is better spent if the program is there without
going through the fashions of it.
So I believe that it is, in a sense mandatory or society is request-
ing that when it happens. If it's incorporated in where the farmer
has it automatically at the current levels he has, then he has to
choose which levels he wants to go up to.
But I really think the time — we've followed this argument for 16
years and the argument was the same 16 years ago. From a cost
accounting standpoint, I believe that it's time to get the argument
over with, choose one system or the other, but do something. Thank
you.
[The prepared statement of John Keister appears at the conclu-
sion of the hearing.]
81-128 0-94-5
124
Mr. Johnson. Thank you, Mr. Keister. Mr. Bruce Kleven. Again
tor each of you who happen to have augmented your statements
with a written statement, your written statements are received for
the record of the committee and we will take those back to Wash-
ington with us. Mr. Kleven.
STATEMENT OF BRUCE M. KLEVEN, STAFF ATTORNEY
FARMERS' LEGAL ACTION GROUP, INC.
Mr. Kleven. Mr. Chairman, members of the committee, my
name is Bruce JQeyen. I'm a staff attorney at Farmers' Legal Ac-
tion Group, FLA.G for short, located in St. Paul, Minnesota I also
tarm with my family up in Milan, Minnesota, a stone's throw from
Kepresentative Minge's hometown.
I have written testimony that has been submitted. I will just
summarize here. Much of my work this past year has focused on
analyzing existing disaster programs and answering phone calls
from disaster-stricken farm famihes. As you know, a lot of people
had trouble and when they needed a legal hand, they called us
My comments this morning are directed at some of the legal is-
sues that were raised m the heat of the disaster last summer and
how they fit into the proposed crop insurance reform legislation
Before turning to that, I want to focus on some statutory lan-
guage that s in the bill. If my colleagues in the legal profession get
hold of some of this, they can twist it into interesting contortions.
Ihe one Im talkmg about, of course, is the $50 per crop per
county, and that s been talked about quite a bit this morning The
hrst issue that we had over that was the payment if someone with
800 acres of corn paid the same $50 as someone with 80, and that's
been discussed quite a bit this morning. But one that hasn't is
number two that I have. What happens when a farmer has more
than two crops?
The language, as it stands, provides that catastrophic insurance
can be purchased at $50 per crop per county, not to exceed $100.
Ihis clearly allows for two crops to be covered at the catastrophic
level Yet, there is no statutory mechanism for covering third and
fourth and fifth crops.
On one hand, from Washington we're hearing that we should di-
versity and go into sustainable practices which will probably re-
quire five crops for rotation. Yet, our catastrophic coverage is clear-
ly only allowed for two.
Mr. Johnson. I think, Mr. Kleven, the goal here is to allow cov-
erage for all your program crops, regardless of how many you
might have, but that you would not have to pay more than $100
in processing fees. I would certainly share your view that we need
as much diversity as possible and we would not want to do any-
i^^ S-^^ ^°"^^ ^^^^* *^^* diversification. But a good point
Mr. Kleven. That's just something that stood out when we read
the language, could somebody construe that in a weird way and
ot course, I did. But that would cover my question there.
Second, then $50 per crop meaning crop raised, meaning all
fields or per field. Again, this has to do with 20 com fields covered
tor the same $50 for one com field, and I think that has already
been addressed this morning, again, following your comments
125
FLAG would encourage the Committee to address these ambigu-
ities to avoid improper interpretation problems during the agency's
rulemaking process.
Turning to something that happened this summer of a legal na-
ture. One important issue that was forced to the table this summer
is proper cancellation of insurance contracts. Earlier this morning,
Mr. Ackerman mentioned that policies should not be ad hoc and,
in fact, they constitute a contract.
It is the contractual relationship that I wish to address and I
have two examples of phone calls I received this summer. In one
case, a producer purchased crop insurance by April 15 and the com-
pany agreed to provide coverage at a certain level.
The producer reported the planting dates, but did not provide the
exact number of acres through an oversight on his part, which he
admits. After the farm was flooded in August, the insurance com-
pany notified this producer that they were cancelling his policy
even though this contract had been formed. The reason was that
he did not report the number of acres.
In another case, a far worse case, this person did the same thing,
except he received disaster assistance back in 1992 and as a condi-
tion for program participation and collecting disaster last year, he
had to buy it for 1993. So he signs up by April 15. He purchases
the policy. This person also did not report the acreage. He did turn
the acreage into ASCS and he honestly believed it was good enough
because he figured ASCS, Federal crop and it was the government,
and he turned them in.
Again, the rains came and along about August, they called him
and said "We're cancelling your policy." When ASCS discovered
this, they said "Oh, you're out of compliance with your 1993 insur-
ance contract. You've got to pay back your 1992 disaster, as well."
So this guy, after making what he believed was a good-faith ef-
fort, wound up with no insurance coverage for 1993 and he had to
pay back his 1992 disaster, as well.
Now, the regulations governing the crop insurance program pro-
vides specific reasons for cancellation of an insurance policy. Vgdid
reasons for policy cancellation include failure to pay the premium,
fraud, misrepresentation, death and judicially declared incom-
petency. However, failure to provide planted acreage and planting
dates are not valid reasons for cancelling the policies.
In a year that producers needed this coverage most, it appeared
that insurance companies were all too eager to cancel policies
whenever they could. FLAG would just encourage you to address
an issue in your legislation to that nature. Thank you.
[The prepared statement of Mr. Kleven appears at the conclusion
of the hearing.]
Mr. Johnson. Thank you, Mr. Kleven. Appreciate your insights.
Mr. Jim Lewis is the next individual on our list. Welcome, Mr.
Lewis.
STATEMENT OF JIM LEWIS, LUVERNE, MN
Mr. Lewis. Thank you. Honorable Chairman, Congressman John-
son, David Minge and Collin Peterson, thank you for the oppor-
tunity to say a few words today about Federsd crop insurance. I as-
sure you it will be very few.
126
•I?A^o?.o"^P^ veteran of the Department of Agriculture, all of it
with ASCS, but I worked very closely with Federal crop insurance
during this entire period. I believe Federal crop insurance is a very
important tool in the stabilization of agriculture. It offers an oppor-
tunity to protect that bottom line.
I look at Federal crop insurance as a management tool or nec-
essary expenditure in the farming operation. Part of the reason for
the low usage of the Federal crop insurance is, first, coverage is too
low to protect the investment. Second, the cost of protection is too
high even with the Federal subsidy. Third, the Federal Gk)vem-
ment always bails out the farmer with disaster funds with or with-
out Federal crop insurance,
I think this is something we've always told our people. If you
didn t take Federal crop insurance, you're going to be in trouble
and It seemed like you guys always bailed them out.
I feel we need to do three things. We should use these disaster
hinds or at least part of those disaster funds to increase the Fed-
eral crop insurance subsidy, and I think that's what has been
talked about all day. We need to increase the coverage; yet, we've
got to keep the program actuarially sound.
Third, we must say no to these disaster bail-outs. I think we've
been— or at least I used to tell people in my office ten or 15 years
ago that if you didn't take crop insurance, you weren't going to be
protected. I was proved wrong quite often.
I'm sure you've done it with good intention. Farmers would get
in serious trouble and they would have been in very serious trouble
without that help. So I'm not critical. I'm just bringing up the facts.
I think lenders will insist on the insurance protection, if we have
a good program. I read recently where one Senator commented that
we cannot increase the subsidy to Federal crop insurance due to
budget restraints and that disaster payments are not part of the
budget. Well, they are still tax dollars and they come from some-
where. I think we should be able to work that out.
Another issue is preventive planting. We had this in the past and
it s very, very hard to administer. We'd have to be very strict with
meandering land, with producers that probably farm more than
they re able to handle, poor management practices and so forth.
Thank you for allowing me to say a few things.
Mr. Johnson. Thank you, Mr. Lewis. Appreciate your input on
It. And you are right, I think, on all your points. In 1980, Congress
said we re going to do crop insurance and we're never going to do
a disaster payment again. That turned out to be a not very credible
promise The mechanism that we're looking at utilizing this time
is sort of a stop-me-before-I-spend-again kind of mechanism, where-
by obviously we cannot totally prohibit what a future Congress or
future White House wants to do, that's their prerogatives, but we
can change the rules.
Currently, if you want to spend disaster money, you can simply
do so without raising taxes or cutting other spending, unlike all
other kinds of spending which require budget neutrality. We're
going to change those rules so that m the future, if a Congress or
a White House wants an ad hoc disaster bill, they're either going
to have to raise someone's taxes or cut the rest of the Ag budget
to pay for it.
127
That is going to be exceedingly difficult to do with the kind of
political environment that exists in Washington today. So I think
that there will be teeth in that promise. I'm sure there will be
skeptics, nonetheless, until we go through a cycle of no crop disas-
ter payments, but the mechanism will be a strong one.
The next individual is Mr. Stan Gyberg.
STATEMENT OF STAN GYBERG, FARMER, LUVERNE, MN
Mr. Gyberg. Thank you, Mr. Chairman, for coming to Luveme,
Minnesota. We appreciate your being here. I think one of the con-
cerns I've had while I've been listening to this — most of my notes
aren't going to be as complete. I've been writing them down as I've
been going here. ^ , „ ,
One of the concerns I get is I hear a lot about the $2 billion we re
spending for agriculture and the consumer always being concerned
that that's our tax dollars. But I also have to point out to them
that we have $10 billion spent in Florida, we have $10 billion spent
in LA, and those are my tax dollars. So I'd like to keep that point
clear that it works both ways.
It seems that in agriculture, we're always the first ones that are
talked about when we cut the budget and we've taken a lot of cuts
already and our programs seem to be getting smaller all the time.
That's one of my observations.
The next thing I'd like to get to is that it concerns me that our
insurance coverage doesn't get more into the ASCS office than it
is. I understand your point that someplace there is an agent. In
this area, we are very well provided for by private coverage and I
think they do a good job, because they are very competitive. When
there is something wrong, they will explain things to me. They will
take the time when they have to. Like this last fall, they were
working from 7 o'clock to 11 o'clock at night.
There are no 8-to-4 hours and stuff like that. If I don't like them,
I can go across the street and get somebody else. That's what
makes the insurance companies, in my view, good, because they
have to be in order or they don't survive.
I like the per acre assessment. I like that. I think our insurance
has to be affordable. I think we have to subsidize the higher levels,
because when I go into a bank or someplace, I need a certain
amount of money to work with. When I look at 50 percent or some-
thing like this by the time I'm down there, I really need that
money. But I still need 65, 75, whatever the coverage has to be to
operate and those levels have to be affordable.
So I think those discounts that you're talking about have to go
through the higher systems of our coverage. I think Jim Lewis
talked about some of the points of why people don't buy insurance
is because they feel that government is going to bail them out any-
way. I think we should stick to some policies.
Last summer I visited my ASC office more than I visited anybody
else in the whole county here, trying to keep up on program
changes, insurance changes and this type of thing. I have had 27
years of crop insurance coverage and I'll tell you I'm not ahead of
the game. I think when you talk about, well, if you turn this over
to the state private insurance companies, they deal with car insur-
ance. If you're in different areas, it costs you different.
128
I don t know how the Government sets their rates, that somebody
^ J u ^°^^^ &®^s $2 versus 43 cents or whatever it is. If we have
good history, we should have cheap coverage. If you have a poor
history, you should pay for it.
That's mainly my observations here. If you have any questions,
Mr. Johnson. Thank you, Mr. Gyberg. I think you raise a good
point. 1 think many people will buy all of their insurance through
a private insurance agent, because there is nothing in the reform
that requires you to buy your insurance from the ASCS office I
think it IS important. I think people will increasingly utiUze their
private insurance agency.
I think you raise a good point, as well, on the Florida and LA
disasters. Being the devil's advocate a bit, South Dakota and Min-
nesota and wherever else will continue to get the same kind of re-
hef they get in LA and in Florida if your house washes away or
whatever happens. But agriculture is the only sector of the econ-
omy that gets compensation for lost revenue. No other sector does
and that s why we are trying to perfect this crop insurance system'
so that we do continue to provide that kind of relief.
Thank you. We will go next to Mr. Mack Willers.
STATEMENT OF MACK WILLERS, FARMER, BEAVER CREEK, MN
Mr. Willers. Chairman Johnson and members of the committee
I would just like to make a couple comments. First of all, from a
farmer s standpoint, you always buy insurance mandatory if you're
a young farmer. I started farming 17 years ago and as a lender bor-
rowing me money, your insurance is mandatory. So any part about
arguments of not mandatory is not true.
^n^o^°^^o ^^^^ ^^ years, I have never collected a penny, even in
1983, 1988 or last year. So I think the idea of going back to lesser
amounts of premium due to your loss would be obviously well
The other part I want to comment on is on the ASC committee,
we gave out $10 miUion in this country last year and we're not
done yet. Your comment about it helping is obviously there, wheth-
er people want to admit it or not. The thing that bothers me— a
couple things.
If we reform this, there are a few details that I'd Uke to point
out. If we're going to do away with disaster, there won't be any dis-
aster for the people that grow hay. The way the hay program
works now is that every time that you have a disaster, you lower
the amount and you can never raise it. If that's going to come
under the insurance program, that part would have to change.
Also, as you are having debt or structuring budget for USDA and
you re talking about retraining these USDA employees or going
into an FSA, where is the money going to go to retrain the crop
insurance people? Because when we go through a forum of people
in from the elevator that has a Hst of every form they bring in, we
have to do it by hand at the ASC office to figure out where they
are, and we don't use the same form as the crop insurance people.
So someplace along the line you guys are going to have to have
the actuarial people come up with that. The other question I have
IS where the ASC committee will stand on setting yields. Now,
129
we're going to have the CRP acre start coming out. Are we going
to come back and go back to their original corn base and what kind
of value are we going to put on that base since it hasn't been
farmed for so many years.
Will we be able to get decent crop insurance for them people? Be-
cause in western Minnesota, west central, and in South Dakota,
there's a lot of acres in some of these counties that there's going
to be income needed from. I think one of the other things I was
worried about is your new MVP pilot project. My question is it
sounds wonderful to be able to ensure at a higher level, but if you
can do that and you have a loss or you're near a loss, will the peo-
ple be interested in destroying the crop because they won't have
any basis to gain from the price difference in Chicago compared to
local grain price.
Will you actually make the farmer go out and destroy a 0/92 so
they can get paid more, because there wouldn't be any basis dif-
ference.
I talked to Mr. Clifford Parker, he's the Director of Claims at
FCIC, about last week and he said there was no mechanism in
there to counteract that yet. So maybe you could look into that.
Thank you for your time.
Mr. Johnson. Thank you, Mr. Willers. I think you raise a good
point that we continue to need to expand the crop insurance pro-
gram to added crops, and, obviously, there has to be a mechanism
and there is a mechanism to provide some protection for
nonprogram crops. The CRP question will be taken up in the 1995
farm bill. That remains to be seen.
I have a feeling that we're not going to simply totally terminate
that program, although it's true that we may not have the full level
of budget that we have now. And the pilot project we will have to
monitor very closely. I think we need always to be trying out inno-
vative new ways of trjdng to protect farm income.
This is one that may not work at all. It may be work. There may
be portions of it that work. So we're sort of, I guess, waiting to see
the final report come in to see how it proceeded. But I appreciate
your caution on that issue.
The last individual we have on our list that's reported to me is
Mr. Randy White.
STATEMENT OF RANDY WHITE, STATE REPRESENTATIVE,
NORTH CENTRAL CROP INSURANCE, INC.
Mr. White. Thank you. Congressman, for coming to the Midwest
to address this issue on crop insurance. There are some things that
I would like to point out here.
First of all, as we all know, everything comes from the ground
and we need to protect the viability of agriculture, at no matter
what cost. Multiperil crop insurance is one aspect of that. In South
Dakota, where I'm from, in 1993, our company had 2,700 losses. I
know that some of the people from Minnesota felt that the level,
the 65 percent level did not provide them adequate coverage.
I have 2,700 people in South Dakota that collected a lot of money
that they would not have had they not had the 65 percent level.
They were very happy to get that money.
130
In visiting with these farmers, and I was out and adjusted a
number of them, they would certainly support eliminating disaster
payments if they could increase their level of coverage a reasonable
premium It definitely would be a situation that they would accept
Many farmers in South Dakota in 1993 that suffered losses
would not be farming in 1994. They would not get the funding from
their banks if it were not for the multiperil crop insurance pro-
gram. Many banks do look at that when they go to make the loan
to that farmer.
Multiperil crop insurance versus disaster would be more accept-
able, I would imagine, to the people in the metro areas because the
farmer does contribute to the plan, which, in most farm programs
they do not. '
The CAT plan for 1994 concerns me a Httle bit because in 1993
when the 35 percent level came out, we had more problems with
the 35 percent level than any of the other levels, simply for the fact
the farmer was not happy when we adjusted it. Even though they
were told at the time they purchased the policy that they had very
low coverage, when it came time to collect, they were very unhappy
because they had lost their crop and they were getting very small
amounts.
We had situations where people were paid a couple thousand dol-
lars that could have gotten $50,000 or $60,000 had they bought the
higher levels of coverage. It concerns me that that would give the
multiperil policy another black eye that we do not need.
Preventive planting coverage is in the 1994 crop policy. It con-
cerns me a little bit because there is some confusion regarding the
number of acres available for coverage and how it will be allocated
or prorated. We've had several meetings with FCIC. There is some
confusion regarding that. I think a lot of farmers think that if they
don t get it planted, they're going to have coverage, and that is not
necessarily the case.
The dual delivery system also concerns me. The multiperil policy
can be very confusing to the client and I'm afraid that it would
cause more confusion having to go possibly to the ASCS or to inde-
pendents. They're not going to know what they should do. Inde-
pendent companies are also forced by the client to do a good job.
If they don't, as the gentleman earlier indicated, the person can
chzmge companies.
Also, I'd like to address the issue that was brought up about
competition among companies. Multiperil crop insurance is not like
hail insurance in the aspect that there is a lot more paperwork
Companies need the staff to handle this paper flow for the acreage
reports, the production reports, et cetera.
With differences in rates, business could be transferring from
year to year, causing more confusion. As someone said earlier,
there is a lot of confusion in this product. If rates were different
every year, different companies would have different levels of pre-
inium. Those policies could be transferring from one company to
the nejrt. It's very hard to staff and to be able to handle your work
load when you can't anticipate what kind of a premium you're
going to be dealing with. I feel that that may cause some compa-
nies to withdraw from the multiperil market.
131
Thank you very much for your time and I appreciate you coming
here.
Mr. Johnson. Thank you, Mr. White. I appreciate your observa-
tions on the competition and, also, on the administrative difficulties
of implementing preventive planting programs. I think we're all
very supportive that you've got to have preventive planting cov-
erage, but obviously there's a lot of complications in getting it done
right. Thank you for your observations.
I want to thank the Luverne VFW for hosting this hearing in
what is really an excellent facility for this kind of gathering. The
community should be awfully proud to have this kind of facility.
And thanks to VFW, as well, for the coffee provided and for the
warm welcome that we've had to the Luverne community.
Mr. Peterson, do you have any closing comments?
Mr. Peterson of Minnesota. Again, I appreciate your leadership
and look forward to working with you to start this all up.
Mr. Johnson. Thank you. Mr. Minge?
Mr. Minge. I would also like to thank the VFW, the community
of Luverne for hosting this event, and thank you, Mr. Chairman,
for bringing the subcommittee hearing to southwestern Minnesota,
an area that has been so hard hit by the 1993 flooding tragedy.
In that regard, I would like to point out that the Federal Govern-
ment, as of March 1, had paid out approximately $2.5 billion in ag-
riculture disaster and crop insurance benefits to the Midwest. Of
that amount, approximately 30 percent came to Minnesota and we
still are not done with all of the adjusting and the disaster assist-
ance claims processing.
We could end up in Minnesota with as much as $1 billion of ben-
efits from the Federal Government to help us and that actually
came to the Second Congressional District. We have received more
money in this congressional district than any other congressional
district in the country for a crop disaster.
As a consequence, I think that we have to recognize that we had
a program last year that, with all of the warts on it, it worked for
thousands and thousands of farm families. If it were not for the
program that we had in 1993, with the shortcomings that it had,
we would probably find that as much as 10 percent of the farmers
in our area would be going out of business.
So we have a passion to improve the program and I continue to
work hard on that and I appreciate everyone coming out to, even
by your presence, testify to the importance of this undertaking, but,
at the same time, to recognize that we do have a program that has
been beneficial.
I look forward to working with all of you in the months ahead
and especially working with Ken Ackerman and the Federal Crop
Insurance Corporation. I'll say it's been a breath of fresh air to
have Mr. Ackerman come to Minnesota twice in 3 months to ad-
dress farmers, bankers. Federal crop insurance agents about the
problems that he sees, having just taken over management of this
corporation, and trying to make the corporation responsive to the
problems that have been identified.
Hopefully, in 1995, and if not 1995, by 1996, we will have a qual-
ity product out there and we won't have to have any more hearings
on this topic for several years to come. Thanks, again.
132
Mr Johnson Thank you, Mr. Minge. Again, there is no lack of
experts m Washington anxious to tell us their points of view and
1 think one of the refreshing things and one of the necessary things
IS that we spend some time listening to bankers, insurance people
and farmers themselves who have to Hve on a day-to-day basis
with these decisions that are made from Washington.
It's very good that Mr. Ackerman has spent an enormous amount
ot time listening to people firsthand. So the nature of any end prod-
uct IS that it involves some compromise and some give and take
and, no doubt, some things we'll like better than others.
But I am confident that if we work closely together, put aside all
the partisan political nonsense that sometimes creeps into public
p^icy today and focus on what makes common sense and what can
etriciently deliver the greatest help to our producers, that we'll
emerge from the end of this year in far better shape than we were
when we went in.
So thank you to all of you for your contributions to this ongoing
rwT^' ^^^' ^® ^^^ adjourn this subcommittee hearing.
[Whereupon, at 12:45 p.m., the subcommittee was recessed to re-
convene at the call of the Chair.]
[Material submitted for inclusion in the record follows:]
133
KENNETH D. ACKERMAN
MANAGER, FEDERAL CROP INSURANCE CORPORATION,
UNITED STATES DEPARTMENT OF AGRICULTURE
BEFORE THE
SUBCOMMITTEE ON ENVIRONMENT, CREDIT, AND RURAL DEVELOPMENT
COMMITTEE ON AGRICULTURE
UNITED STATES HOUSE OF REPRESENTATIVES
LUVERNE, MINNESOTA
APRIL 5, 1994
We want to thank the Subcommittee for holding this hearing today on the
Administration's proposed "Federal Crop Insurance Reform Act of 1994," which was
first submitted to Congress by Secretary Espy four weeks ago. We, and particularly
Secretary Espy, greatly appreciate the Subcommittee's attention to the goal of
reforming Federal crop insurance and very much look forward to working with all
Committee members in developing a plan that will work well both for American
farmers and taxpayers.
As much as any program in Washington, Federal crop insurance has long needed
change. The discontent with this program from farmers, taxpayers, insurance industry
leaders, Congress, the President, and others, has focused on long-standing, well-
documented problems:
0 Despite an annual crop insurance price-tag approaching $900 million,
Washington has had to step in with crop disaster relief payments to farmers in
eight of the last eight years. Standing alone, crop insurance, with a nationwide
participation rate of just 33 percent in 1993, simply has not provided an
adequate safety net. These off-budget crop disaster programs have cost
taxpayers an average $1 billion per year over the last decade, and more than
$1.5 billion per year over the last six years. This conflict between crop
insurance and crop disaster programs must end.
o Crop insurance has chronically lost money. Since 1981, the Federal Crop
Insurance Corporation's (FCIC) insurance operations have produced an overall
"loss ratio" of about 1.47. That means that we have paid out about $1.47 in
claims for every $1.00 collected in premiums and premium subsidies, not
counting overhead costs. Any private business posting these numbers would
have gone bankrupt years ago. Taxpayers are tired of picking up the tab. The
program must be made more financially sound.
134
0 Farmers continue to complain that Federal crop insurance does not meet their
needs. The program must be made more farmer-friendly with new products
more flexibility, and a good attitude toward listening to customers.
Last summer's disastrous Midwest flood and Southeast drought brought the
problems of crop insurance into sharp focus for Americans across the country
Secretary Espy and President Clinton travelled extensively in the flooded areas and
spoke directly with farmers about their problems and experiences in dealing with
Federal programs designed to assist them. Again and again, they heard concerns
These problems ranged from lack of coverage for prevented planting, to inflexible price
elections, to uncertainty about the availability and timeliness of help On March 2 just
four weeks ago. Secretary Espy announced a massive reform program that grew dirictly
irom last summer's experience.
In essence, we are recommending a two-pronged program to fix Federal crop
insurance: (1) reform from the inside out - administrative steps to make the program
more financially sound and farmer-friendly, and (2) reform from the outside in - the
new Federal Crop Insurance Reform Act of 1994."
Federal Crop Insurance Reform Act of 1994
The Federal Crop Insurance Reform Act of 1994 is the centerpiece of our reform
plan. This bill responds specifically to the central finding of our review following last
summer s experience. Ad hoc crop disaster bills over the years have been an effective
act of government for people in crisis. These relief programs have helped millions of
Americans, farmers and non-farmers alike, survive the most difficult periods in their
lives. But the reliance on this ad hoc relief that has developed as a result of an under-
used crop insurance system, has created a level of uncertainty that is bad both for
fanners and taxpayers.
In fact, the repeated availability of ad hoc relief has been a disincentive for
many farmers to participate in the Federally backed crop insurance program.
In a crisis, a farmer without crop insurance, who depends on disaster relief has
no way of knowing in advance what his or her protection will be. Farmers do not
know whether a disaster bill will be approved or. if approved, what payment level the
bill will provide. Even then, a farmer suffering loss must hope that other farmers
across the state, and m ten or twenty other states, are experiencing similar losses in
135
order to create the momentum for action. An examination of history reveals that victims
of local disasters often get less than those of wider disasters, even though the individual
farmers may suffer similar losses.
For example, victims of 1992's Hurricane Andrew in Florida, received aid at
50.04 percent proration while victims of this summer's Midwest flood received aid at
100 percent. Farmers with losses in states not involved in the large disasters found that
congressional decisions affecting their livelihoods were being based upon factors totally
disconnected from their circumstances.
What will happen if natural disaster strikes again next year? Farmers trying to
plan their operations in a businesslike manner simply have no way to know.
Meanwhile, taxpayers are concerned that disaster aid is exempt from the budget
discipline that controls spending in virtually every other area of government. At a time
when deficit reduction is a paramount domestic priority, the price of these emergency
programs continues to rise. The public rightly questions the point of having two
expensive programs trying to address a single recurring problem — crop disaster aid.
Americans are generous in a crisis, but their patience has limits.
The Federal Crop Insurance Reform Act of 1994 resolves this situation by
combining crop insurance and disaster aid into a single, unified, on-budget program.
This requires two steps. First, the legislation expands the crop insurance program to
protect farmers, financially, when natural disasters ruin or damage their crops. Second,
it creates a legal barrier against future ad hoc crop disaster programs.
We view this proposal as being both a vital budget reform as well as a vital
agricultural reform.
The legislation is built upon several key pillars:
1 : Catastrophic crop insurance coverage: The Federal crop insurance program
is supplemented with a new catastrophic coverage level available to farmers of
insured crops for a nominal processing fee of $50 ger crop ger county, up to
$100 per farmer per county. The processing fee may be waived for limited
resource farmers. The idea is to make this coverage very economical and
accessible.
136
Policies will cover prevented planting as well as actual crop losses, and will be
based on actual individual farm yields.
This catastrophic plan will protect against yield losses greater than 50 percent
at a payment rate of 60 percent of the expected market price - a level
comparable to disaster relief programs in recent years. The difference is this:
catastrophic coverage is an individual insurance policy, not an ad hoc relief
payment. It is a contract that a farmer can take to the bank as collateral on a
loan. Even if no other farmer in the country suffers a loss, the farmer has the
security of knowing that he or she is covered.
Under this approach, in a future agricultural crisis, farmers will know in advance
the extent of their protection and taxpayers will know in advance the limits of
their exposure.
2: Buv-Up coverage: Most producers desire higher levels of coverage than the
catastrophic plan offers to protect their fanm businesses. The legislation provides
targeted subsidies for these higher insurance coverage levels. The out-of-pocket
cost for coverage at the 65 or 75 percent yield levels will fall by about 10
percent. In addition, the bill gives FCIC the authority to offer policies covering
85 percent of yield. The more farmers buy higher levels of coverage, the more
fiscally sound the system will be.
^- Linkage to farm programs: To ensure the widest participation, crop insurance
coverage at the catastrophic level or above is linked to participation in Federal
commodity price support, production adjustment, and conservation programs and
Farmers Home Administration loans. We expect that this step will result in crop
insurance participation rising from 33 percent to about 80 percent of insurable
acres.
The purpose of linkage is to guarantee that, if disaster strikes, the bulk of U S
farmers will be protected. We understand that farmers, like other Americans do
not like being told what to do, this is human nature. But the linkage proposal
is fair and not onerous given the nominal cost of catastrophic coverage to
farmers. Farmers also gain security for the future.
4: Delivery: Farmers may choose to obtain the catastrophic coverage either
through a pnvate reinsured company or through a USDA county office. Higher
insurance coverages remain available only from private insurers. Our goal is to
provide the most convenient and efficient means of quickly getting catastrophic
137
crop insurance coverage to the largest number of farmers. The private sector's
insurance sales force will have a full opportunity to compete for the catastropliic
market.
5: Industry comDetition: The legislation restructures premium rates to reflect both
direct premium subsidies and the expense reimbursement allowance to reinsured
companies. This provides a more realistic picture of the cost of the program
both to farmers and taxpayers. More-efficient companies will be allowed to pass
along lowered overhead costs in reduced rates charged to farmers, creating a
more competitive market environment.
6: Uninsurable crops: A standing disaster program is created for crops not
covered by crop insurance, with payments triggered by area-wide loss levels and
protection levels similar to those under the catastrophic insurance plan. This
way, no one is left out in the cold, the wet, or the dry.
7: Repeal of standing disaster assistance authority: Current authorities for
standing crop disaster relief are repealed. In the future, the expanded crop
insurance program will replace disaster bills as the Federal response to
emergencies involving widespread crop loss.
As added protection, the legislation exempts appropriations for agricultural crop
disaster assistance from designation as an "emergency" for purposes of the
Balanced Budget and Emergency Deficit Control Act of 1985, as amended. This
action essentially places future crop disaster bills on budget. They must be paid
by off-setting spending cuts, rather than being allowed to proceed as
"emergency" spending. Therefore, the primary vehicle for providing crop
disaster assistance will be the Federal crop insurance program, as its legislation
originally intended.
We project that the new program created by the Federal Crop Insurance Reform
Act of 1994 will cost about $8.1 billion for fiscal years 1995 through 1999. This
represents a five-year savings of some $750 million compared to the projected cost of
the current Federal crop insurance program plus the average annual cost of ad hoc crop
loss disaster relief programs over the past decade. Essentially, this plan takes the $1
billion that Washington now spends each year on off-budget crop disaster programs and
re-channels it into a more-disciplined, on-budget insurance plan.
We would like to implement this new program in crop year 1995 so that its
benefits of certainty can be felt by farmers and taxpayers. This timetable is ambitious.
138
and will require Congress to do its part. Combining Federal crop insurance and
disaster aid will be a complicated process involving training of personnel, rewriting of
rules, and educating customers. We must do it right.
Achieving Financial Soundnes.s
Resolving the conflict between Federal crop insurance and disaster programs is
not enough. We must, at the same time, also make Federal crop insurance more
financially sound. The old way of doing business, where Federal crop insurance lost
excessive amounts of taxpayer money year after year, is simply no longer acceptable
The 1993 Omnibus Reconciliation Act (OBRA) requires FCIC to achieve an overall
projected loss ratio of 1.1 by the year beginning October 1995. The 1994 Agricultural
Appropriations Act mandated additional cost-saving reforms. We are committed to, at
least, meeting this loss ratio goal and obtaining actuarial soundness. American
taxpayers will accept nothing less.
As part of the March 2 reform package. Secretary Espy released the FCIC's
"Blueprint for Financial Soundness" mandated by OBRA 1993. This document outlines
the specific steps that FCIC will take to improve the program's financial soundness and
the savings we expect to result. Those steps include:
A modified-APH (actual production history) program to better tie individual
farmer's insurance coverage to their individual yield history. We will modify
this program to permit a catastrophic yield adjustment beginning in crop year
An expanded non-standard classification system (NCS) to identify those farmers
with unusually high loss histories and adjust their rates to more sound levels;
Greater emphasis on program compliance to prevent over payments based on
errors and abuses; and
Greater risk-sharing with private insurance companies.
Finally, we will work to make Federal crop insurance more farmer-fiiendly by
introducing new products, more flexibility, and more responsiveness to complaints and
Ideas from farmers, agents, companies, and all participants in this program. Just
recently. FCIC for the first time used the authority granted under the Food. Agriculture,
139
w
Trade and Conservation Act of 1990 to back financially an innovative new insurance
product developed by the private sector. This process of partnership will continue.
The challenge of reforming Federal crop insurance is complex and difficult, but
we believe our plan is a responsible one and will be responsive to the needs of
American farmers and taxpayers. We hope that Congress will act expeditiously on the
legislation so that we may implement the new program for the 1995 crop year.
We will be pleased to answer any questions you may have.
(Attachments follow:)
140
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142
UNITED STATES CROP VALVE SUMMARY
INSURED CROPS
NATIONAL VALUE OF ALL CROPS $92,385,311,215
CROP
REPORTED
ACRES
DOLLAR
VALUE
PERCENT
OF TOTAL
VALUE
Com, Grain
Soybeans
^Vheat
Cotton, Upland
Tobacco
Potatoes
Nursery, Container
Corn, Silage
Oranges
Apples
Peanuts
Sorghum, Grain
Sugar Beets
Rice
Tomatoes - Fresh
Barley
Grapes - Processed
Sugarcane
Raisins
Beans, Dry
Almonds
Tomatoes - Processed
Grapes, Table
Onions
Peaches
Oats
Grapefruit
Lemons
Pears
Plums - Fresh
Sweet Corn - Fresh
Walnuts, English
Sunflowers
Peppers
66,950,480
56,498,545
69,353,948
11,501,930
732,740
1,363,816
6,124,202
770,214
352,114
1,807,325
9,086,031
1,375,468
2,812,429
137,578
7,505,000
408,090
723,840
266,737
2,099,403
413,202
353,911
90,343
146,180
117,823
6,015,517
168,928
59,816
50,031
45,199
191,672
184,837
1,854,495
53,513
18,008,691,703
11,213,520,994
7,296,722,323
4,884,989,171
2,829,953,119
2,396,315,957
2,375,462,434
1,954,333,349
1,515,565,984
1,408,875,579
1,256,883,370
1,203,379,180
1,125,379,300
1,040,085,810
924,639,769
906.414,000
885,062,003
813,706,190
677,942,810
660,075,798
639,048,900
617,956,960
494,035,398
493,421,041
482,137,001
412,485,275
354,979,543
347,117,610
281,428,961
265,029,699
256,059,591
254,4n,036
247,439,110
225,972,741
19.493
12.138
7.898
5.288
3.063
2.594
2.571
2.115
1.640
1.525
1.360
1.303
1.218
1.126
1.001
0.981
0.958
0.881
0.734
0.714
0.692
0.669
0.535
0.534
0.522
0.446
0.384
0.376
0.305
0.287
0.277
0.275
0.268
0.245
.\oveinber j, 1992'
Page: 1
143
CROP EXPANSION
FEASIBILITY STUDY LIST
Feasibility studies are currently underway on the
following crops in anticipation of developing new
crop programs:
AVOCADOS
ASPARAGUS
BLUEBERRIES
BROCCOLI
CANOLA
CANTALOUPE
CARROTS
CAULIFLOWER
CELERY
CHERRIES-SWEET
HAY-ALL
HAY-HAYLAGE
HAY-OTHER
LETTUCE-HEAD
LETTUCE-LEAF
MUSHROOMS
NURSERY CROPS
PECANS
PEPPERMINT
PINEAPPLE
PISTACHIOS
SEED-FORAGE
SEED-LAWN
STRAWBERRIES
SWEET POTATOES
WATERMELON
144
.Participation Under the Reform Proposal
(with linkage)
1S93
1SS5 1SS6 1S97
Crop year
19S8 1SS9
Buy up coverage (//;>. Basic coverage
Lnder the reform proposal, producers who participate in price support and
H.'^?A?^^°'^ ^""^"^ °' "^° ^^'^ '°^^ "^'^^^ ^°y P^°S^ °f 'l^« Farmers
Home Admmistrauoa are required to obtain at least the catastrophic Jerel of
i insurance for oi/ crops of economic significance farmed in the county in which
^a producer has an mterest. The linkage with commodity programs will ensure
tha^paruapation m the crop insurance progr^ is 80 percent of eligible acreage
Requiring producers to obtain catastrophic crop insurance ior prog mm crvps only
would potent.aUy lower the crop insurance participation rate as signiHcant crops
(eg., soybeans) would be largely unaffected. Participation rates would likely be
only as high as 65-70 percent of eUgible acreage.
If crop insurance is not linked to commodity program eUgibUity it is likely
that crop msurance participation wiU be only 55-60 percent of eU-ible
acreage, at least in the early years of program operation. Lower
participation rates could encourage ad hoc disaster assistance which would
lunher undermine participation.
145
TARGETED SUBSromS FOR BUY-UPS
rONfPARISON OF FARMER'S OUT-OF-POCKET EXPENSE
Wrm TARGETED SUBSIDY FOR BUY-UPS:
Coverage
Level
Current
Cost
Cost Under
Reform Act
Difference
65 ?S of yield
75% of yield
S296
S623
S246
S574
-17 percent
- 8 percent
WllHUUT TARGklED S
lUBSroY FOR BUT-l
jTS:
Coverage
Level
Current
Cost
Cost Under
Reform Act
Without Buy-up
Subsidy
Difference
65 fS of yield
S296
S282
- 5 percent
75 5S of yield
S623
S609
- 2 percent
Assumpdons:
100 acres planted/ 100 bushel yield/ SI. 00 price election
10 percent premium rate for 75 percent coverage
Stated costs axe the farmer's out-of-pocket cost for the coverage after deducting the
subsidy.
YEAfl
1981
19S2
1983
1984
1985
198S
1987
1988
1989
1990
1991
1992
1993 (est.)
146
FEDEnAL CROP INSURANCE CORPORATION
PREMIUM/INDEMNITies/LCSS RATIOS
1981 - 1993 (Crop Year Data)
(dollars in Siousancis)
TOTAL 1951 - 1993
AVERAGE 1981-1993
PREMIUM
■-
S379,169
398.671
291.353
435,588
*39.733
381.753
366. 640
•*37.654
820,763
838. 04O
737,146
758.768
784,652
$7,069,930
SS43.841
INDEMNITrSS
$408,101
528.157
587.691
639.969
684,364
616.993
369,163
1.053.775
1.215,763
1.023.581
953.257
920.901
1,412.374
$10,419,089
$301,468
1992 Figure, - Actuals from Oct. 27. 1993 Summary of Business
1SS3 Figures trom Damage Report of Oct. 20. 1993.
LOSS RATIO
1.C8
1.22
2.02
1.47
1.56
1.S2
1.01
2.41
1.48
1.23
1.29
1.21
1.S0
1.47
1.47
CO,MPT.nCLLE.H,.-MT/LOTUS:KWFTE
11.'11.'93
147
CORN - PARTICIPANT
Comparison between Disaster Assistance and MPCI proposed Catastrophic Coverage
••DOES NOT INCLUDE DEHCIENCY PAYMENTS RECEIVED^^
Assumptions: APH yield = 1 20 bushels
ASCS Yield =100 bushels
MPCI price = $2.40^u
ASCS target price = $2.75^u
ASCS deficiency pymt = $0.45^u
Acres planted = 90
Farm
Per Acre
Disaster (.5004 pro-rate)
$3,952.00
$43.91
Disaster (No pro-rate)
$7,898.00
$87.76
Catastrophic Protection
$7,776.00
$86.40
148
FEDERAL CROP INSURANCE CORPORATION
CROP INSURANCE REFORM COMPARED TO DLSASTFR ASSLSTANCF.
CORN NON-PARTICTPANT
YIELD
LOSS
%
100%
PRORATE
50%
PRORATE
REFORM
PLAN
1
100
$ PER ACRE
1
80
40
86
90
67
34
69
80
54
27
52
70
41
20
35
60
27
13
17
50
18
9
0
40
0
0
0
ASSUMPTIONS:
COUNTY AVERAGE YIELD
DISASTER ASSIST. PAYMENT
APH YIELD (REFORM PLAN)
PRICE ELECTION
120 BUSHELS PER ACRE
$1.12 PER BUSHEL
120 BUSHELS PER ACRE
$2.40 PER BUSHEL
149
FEDERAL CROP INSURANCE CORPORATION
« CROP INSLTR-AgNCE REFORM COMP.\R£D TO DISASTER ASSISTANCE
1 SOYBEANS
YIELD
LOSS
100%
PRORAIH
50%
PRORATE
REFORM
PLAN
%
100
$ PER ACRE
100
53
80
90
88
44
64
80
71
36
48
70
53
27
32
60
35
18
16
50
18
9
0
40
0
0
0
ASSL'Ml'lION
COUNTY ANT
DISASTER AS
APH YIELD 0
PRICE ELEC
S:
:RAGE YIELD
SIST. PAYMENT
ElEFORM PLAN)
TION
45 BUSHELS 1
S3.91 PER BUSH]
45 BUSHELS 1
SS.90 PER BUSH]
'ER ACRE
iL
PER ACRE
EL
150
COTTON
Comparison between Disaster Assistance and MPCI proposed Catastrophic Coverage
EXAMPLX#1
Assumptions:
APH yield = 406 pounds
ASCS Yield = 406 pounds
MPCI price = $0.53/Ib
ASCS target pnce = $0.729/lb
ASCS deficiency pymt = $0. 1 86/lb
Acres planted = 92.5
Disaster (.5004 pro-rate)
Farm
$3,813.00
Per Acre
$41.22
Catastrophic Protection
$5,971.25
$64.55
Disaster (No pro-rate)
$7,620.00
$82.38
EXAMPLE #2
Assumptions:
APH yield = 383 pounds
ASCS Yield = 406 pounds
MPCI price = $0.53/lb
ASCS target pnce = $0.729/lb
ASCS deficiency pymt = $0. 1 86/lb
Acres planted = 92.5
Disaster (.5004 pro-rate)
Farm
$3,813.00
Per Acre
$41.22
Catastrophic Protection
$5,633.00
$60.90
Disaster (No pro-rate)
$7,620.00
$82.38
151
COMPARISON BETWEEN CATASTROPHIC RISK PROTECTION
AND
DISASTER ASSISTANCE
WHEAT - PARTICIPANT
Bushels
produced per
acre
0
5
10
15
20
Catastrophic
Risk With .5004 With No
Protection Pro-rate Pro-rate
$32 18 $19.44 $38.86
$22 43 $15.07 $30.11
$12 68 $10.69 $21.36
$2 93 $6.31 $12.61
$1.93 $3.86
25
30
WHEAT - NONPARTICIPANT
Bushels
produced per
acre
0
5
10
15
Catastrophic ^.^^^ jqq^ ^j^^ nq
'^'^^ Pro-rate Pro-rate
Protection
$32.18 $16.61 $33.20
$22.43 $12.42 $24.82
$12.68 $8.22 $16.43
$2.93 $4.03 $8.05
20
25
30
ASSUMPTIONS:
33 Bushel/ Acre ASCS yield and APH yield
MPCI Market price of $3.25
Target price of $4.00
Loan price of $2.58
Flex acres calculated at 65 % of target
152
United States
Department of
Agriculture
Federal Crop
Insurance
Corporation
Office of
The Manager
Washington, D.C.
20250
Honorable Collin Peterson
U.S. House of Representatives
1133 Lxjngworth House Office Building
Washington, D.C. 20515-2307
Dear Congressman Peterson;
This letter provides answers to questions you asked at the field hearing for the
Subcommittee on Environment, Credit, and Rural Development of the House Committee on
Agriculture in LuVeme, Minnesota, on April 5, 1994.
You asked about the difference in farmers' costs if the processing fee for catastt-ophic
coverage is assessed at the rate of $0.50 per acre radier than the amount of $50 per crop as
contamed in the crop insurance reform proposal. The Department of Agriculture (USD A)
estunates that the effect would be minor for farmers in general. The fee of $50 per crop has
an estimated cost to farmers of $190-200 million during fiscal years 1995-1999 whereas a
fee of $0.50 per acre would cost $230-240 million for the same period. The reason for this
relatively small difference is that the average crop policy is estimated to include 120 acres,
which results in an average cost of $60 per policy at the per acre fee.
Of course, the per acre fee changes the distribution of costs among farmers. Those
producing fewer than 100 acres of a crop would pay less than the $50 fixed fee. This
appears to establish a more equitable distribution of costs in terms of ability to pay.
However, USDA believes that the cost of establishing the catastt-ophic coverage is largely
mdependent of acreage. Costs do not change markedly for issuing the poUcy and handling
the papenvork for varying acreages. This is the reason USDA proposed, and continues to
support, the concept of charging a fixed fee per policy, with waivers for limited resource
farmers.
You also asked about the effect of different subsidy arrangements for the catastrophic
coverage. Specifically, you wished to know the potential differences in costs of varying
catasu-ophic coverage levels and prices (such as 35 percent yield, 100 percent price
[35/100]). The difference (in millions of dollars) for fiscal years 1995-1999 relative to the
proposed plan of 50 percent coverage, 60 percent price (50/60) are shown below:
iir\
153
Honorable Collin Peterson
Alternative
Cost
Difference
Coverage/Price
50/ 60
$1,675
N/A
35/ 100
1,400
$275
50/ 40
1,120
555
50/ 50
1,400
275
50/ 55
1.550
125
The costs of a plan that provides 40 or 45 percent coverage of yield at 50 percent of
price would fall between the estimates for 50/40 and 50/50.
Please let us know if you wish to receive additional information concerning the reform
proposal and estimated costs of alternatives.
Sincerely,
Kenneth D. Ackerman
Manager
154
Statement of AI Christopherson, President, Minnesota Farm Bureau Federation
House Agriculture Committee, Subcommittee on Environment, Credit and Rural
Development field hearing, April 5, 1994
Subject: Clinton Administration's Federal Crop Insurance Reform Proposal
Thank you for this opportunity to comment of federal crop insurance reform and
its impact on Mimiesota farmers. I would like to commend Subcommittee Chairman
Johnson and Congressman Minge for bringing this important hearing to Minnesota to hear
from us firsthand.
I would also like to commend the Clinton Administration for recognizing the
tremendous need for reform of the federal crop insurance and disaster programs. With
a national utilization rate of less than 30 percent, and average annual disaster payments
of over a billion dollars, the time has come to completely overhaul a system that isn't
working for farmers or taxpayers.
Secretary Espy has accurately commented that the current program's high
premiums and spotty coverage combine with the disaster program to virtually guarantee
low participation in the program. The time to reform the system in a serious and
comprehensive manner is long-overdue. The existing combination of inadequate coverage
and disaster programs satisfies no one involved.
155
The stated goal of the Clinton reform proposal is to boost participation in the crop
insurance program by providing adequate coverage to producers, and thereby eliminate
the need for emergency disaster assistance. The Farm Bureau fully agrees with this
central goal, and are committed to helping this restructuring occur. Farm Bureau
policy states that crop disaster programs and crop insurance should be combined into a
single voluntary program designed to obtain the greatest amount of participation. We can
all agree that today's pattern should be replaced with a more common sense and
responsible model.
As you know, the Clinton plan compels farmers to purchase the minimum amount
of federal insurance on eligible crops to participate in any USDA programs. This
mandatory part of the program is our most fundamental practical and philosophical
objection to this reform plan. An unattractive crop insurance policy cannot be made
pretty to farmers simply by mandating program participation. This avoidance of the crop
insurance program's basic inadequacies will not result in a long-term solution to the
problem.
We need a program that makes crop insurance a good idea in the free marketplace.
The shortcut provided by mandated coverage virtually assures that budgetary and other
pressures will continue to force a federal crop insurance program that simply does not
make sense economically for the typical farmer. That is precisely why participation is
so low nationwide today.
81-128 0-94-6
156
The mandatory provisions, combined with a cost that is bound to grow with time
and budgetary pressures, also establishes a state-control mechanism that could become
extremely costly to farmers. Although the fees for catastrophic coverage are very limited
in the initial proposal, fiscal realities suggest that this pricing system would not remain
inexpensive long.
Farm Bureau policy has consistenUy opposed mandatory linkages between crop
insurance and farmer program eligibility. The more cross-compliance restrictions and
mandatory conditions we add to federal programs, the less basic business decisions are
left up to the farmer in the marketplace.
In addition. Farm Bureau members oppose the program's continued reliance on
yield as a trigger mechanism for insurance payout. Coverage based on dollars per acre
would make much more sense. Reliance on yield as the determinant tends to skew the
program in favor of high-risk production acres and makes it much more likely that gaps
in coverage will exist.
Although we recognize that full consideration of crop insurance reform may not
occur until the 1995 Farm BUI. pledge our commitment to working with the
Administration and Congress to design a workable program that meets all of our goals.
I am convinced that all parties can come together to fix a system that is clearly
broken. Again, however, in order to do that, we simply must design an insurance
program that good businesspersons will want to purchase. Wider mandated coverage
simply eliminates that possibUity and further complicates the maze of govermnent
requirements.
157
April 5, 1994
United States House of Representatives
Committee on Agriculture
Sub -Committee on Environment, Credit and Rural Development
The Federal Crop Insurance Reform Act of 1994
Comments to the hearing on the Administration's Crop Insurance Proposal
VFW Hall in Luveme, Minnesota
Testimony provided on behalf of the Minnesota Corn Growers
Association and the Minnesota Soybean Growers Association
by Richard Peterson of Mountain Lake, Minnesota
I would like to thank the committee for coming to Minnesota to hear our
concerns regarding Federal Crop Insurance Reform. My name is Richard
Peterson and I am here today to represent the Minnesota Corn Growers
Association and the Minnesota Soybean Growers Association. I am a
farmer from southwestern Minnesota, by Mountain Lake, where I grow corn
and soybeans.
We feel the catastrophic coverage for insurable crops is adequate for
it's intended purpose. The cost per crop, not to exceed $100.00 per
producer, per county, will penalize producers farming in more than one
county if language is left as is. It would be beneficial to address
limits for producers farming in multiple counties or states.
158
In requiring producers to obtain this coverage to be eligible for price
support, production adjustments and conservation programs, you will most
likely find some who object. Our position is that it seems reasonable
and we do not object to these requirements.
We are pleased that producers will have a choice under the dual delivery
system. They may sign up in programs and insurance at the same time, or
they may complete applications for the catastrophic coverage when they
buy additional coverage from their crop insurance agent. The only
concerns we have are the costs to train and/or the increases in
paperwork this may cause our government offices, currently ASCS offices,
which would be renamed Farmers Service Agency under the restructuring of
the USDA.
The use of Actual Production History (A.P.H.) for the four (4) previous
crop years, building up to ten (10) years, along with transitional
yields (T-yields) if A.P.H. is not available, is a step in the right
direction. Prevented planting and disaster considerations should allow
for A.P.H. and county averages to be maintained at realistic levels.
We support the requirement for producers to insure all land (production)
in the county for that particular crop. This broad coverage will help
the actuarial soundness of catastrophic and higher levels of coverage.
159
The buy-up coverage needs to be written as an incentive rather than a
dis-incentive for the 75% coverage level. These premium rates should be
set much like hail insurance on a county by county basis. Whatever
levels of premium subsidies are available, it should favor the 75% or
higher, rather than lower. Doing this will contribute more premium
dollars to the insurance program, with a greater percentage of producers
participating, because the coverage will more closely reflect the cost
of production. Extremely broad coverage, including most all producers,
will be necessary to eliminate the political need for ad hoc disaster
programs. Higher levels of coverage will help accomplish this. We
would also favor consideration of 85% coverage level being available for
farmers who wish to purchase it .
We have a concern that the proposed Group Risk Plan doesn't appear to
make allowances for the variation of productivity within counties. Many
counties vary widely from rich productive soils to lessor or upland
soils within county lines. The Market Value Protection Plan is new and
will be more slowly accepted. We feel the plan has potential and should
be offered through private insurance agents who can assist the producer
with this more technical plan. This protection plan may need to be
tried as an experiment or on a trial basis to check out its effect for
both the producer and the protector.
160
in addition, we want to be certain preventative and late plantings for
corn and soybeans are included in basic coverage. Also, we would like
to improve the price selection formula to be more realistic for current
corn and soybean prices.
we feel that the Administration's Crop Insurance Proposal is a big step
in the right direction and applaud all those involved in making the
progress this proposal brings. We wish to thank Congressman Minge for
requesting this hearing, so that additional discussion has the
opportunity to enhance this proposal's outcome.
161
PRESENTED BY FRANCIS BUSCHETTE,
MEMBER OF MINNESOTA ASSOCIATION OF WHEAT GROWERS
RENVILLE, MN
My name is Francis Buschette and I farm near Renville, Minnesota.
I am testilying on behalf of the Minnesota Association of Wheat Growers.
We appreciate this opportunity to express our views on the
proposed Federal Crop Insurance reform and whether it could adequately
replace disaster programs.
Let me begin by saying that the Minnesota Association of Wheat
Growers would support a significantly improved Federal Crop Insurance
program over the disaster programs we have had in the past.
We recognize the funding problems associated with having both an
improved crop insurance program and a standing disaster program.
However, we believe, an adequate, affordable and proven new insurance
program should be operational before all disaster authority is abandoned.
A strong basis for development of a viable new program is on the board.
But until such a time that a new regime of yield and price risk protection is
proven to be effective, we urge continued standby authority for disaster
relief programs.
On the specifics of crop insurance reform, we strongly support the
Actual Production History (APH) based on four years; however, a high
Page I
162
priority for FCIC should be to develop and implement a catastrophic yield
clause. This would stop the APH yield reductions for producers in a region
that has experienced abnormally high losses during the four years of the APH.
This need is very evident in Minnesota when you consider that the losses due
to a 100 year flood will account for 25 percent of an individual's APH. On
the positive side, the decision to use individual APH as a base for catastrophic
yield coverage instead of an average or ASCS yield is very important and is a
welcomed improvement over the disaster program.
In another comparison, we find that the disaster program has an advantage over
Federal Crop Insurance when it comes to de minimus yields. The lack of a de
minimus yield for crop insurance has been a glaring negative factor for growers,
especially in light of ASCS implementing a de minimus yield in last year's
disaster program. This inequity needs to be corrected.
For many wheat producers, the catastrophic coverage will not be adequate to
meet their risk management needs, so they will want to purchase additional
insurance. The reform proposal, with additional funding, should provide
reductions in premiums at the higher coverage levels. This would be very
important for long-term crop insurance customers who will want to see benefits
from reform.
163
One possible benefit could be reduced premiums at the 65 and 75 percent
coverage levels under the proposed reforms. Nevertheless, what effect this reform
proposal will actually have on premiums for increased coverage is something we'll want
to know.
Finally, we beheve that additional premium subsidies should be extended to
the 65 and 75 percent coverage levels, which would help make this reform package
adequate enough to replace disaster programs.
Thank you for this opportunity to express our views.
Page 3
164
Testimony
on Federal Crop Insurance Reform Act 1994
Before the U.S. House Committee
on
Agriculture Sub-Committee on General Farm Commodities
Aprils, 1994
Luveme, Minnesota
Presented by
Gerald Lacey President of
National Barley Growers Association
Campbell, Minnesota
165
Good Morning. My name is Gerald Lacey. I grow barley, wheat and
sugarbeets with my son on a farm near Campbell, Minnesota. I am cur-
rently serving as the President of the National Barley Growers Association.
It is an honor for me to present this testimony in front of this select commit-
tee. We, as farmers, understand that reform is needed to keep abreast with
the ever changing world. We also understand the difference between
meaningful reform and budget driven, political reform. It is difficult for me to
testify upon this proposal when the Senate just voted to reduce expendi-
tures for the proposal by $250 million. I would hope that you as elected
officials would put aside the political bickering and assist us producers in
establishing a Federal Crop Insurance policy that would adequately protect
us from the whimsical ways of Mother Nature. I would like to address three
main concerns in my testimony: ; - ••^
1 . Same percentage rate of subsidy for 65%, 75% and 85% price se
lection level. • ' ■ - '' ^ '■
2. Allow ASCS to sell policies.
3. Support a Gross Revenue Insurance Pilot Program for Minnesota,
Mississippi and North Dakota. : ^ -c
se-
1) Same percentage rate of subsidy for the 65%. 75% and 85% price
lection levels:
We agree that a catastrophic coverage must be offered to producers in
order to get participation up to that levd where everyone will feel comfort-
166
able that there will be no more ad hoc disaster bills. We would suggest
increasing the rate of subsidy provided for enrollment in the 65 percent
level and also for the 75 percent level and the proposed 85 percent level of
price protection. Producers are being pushed into the higher price selec-
tion levels because of the constant increase in the cost of production.
2) Administrative Costs:
I have taken out Federal Crop Insurance from my agent since 1989.
During that time I have helped him enjoy a very good standard of living
because of the guaranteed commission. I would like to suggest that we
allow the ASCS offices the opportunity to sell the Federal Crop Insurance
policies. This is not new or unique, but something they have handled in the
past. I would also suggest that the ASCS offices charge a 10 percent fee to
cover their costs of doing business. Perhaps this could be done on a pilot
project basis. I make this suggestion in the hopes that the insurance com-
panies will be challenged to make their money competitively in the market,
not through a controlled, guaranteed system. The burden of balancing the
budget should not have to be bom solely by the producers and not the rest
of the industry.
3) Pilot Program
As a representative of the Minnesota Barley Growers Association I would
also like to speak in support of introducing a Gross Revenue Insurance
167
Program on a trial basis in Minnesota, Mississippi and North Dakota. My
thoughts behind this are fairly simple. Lenders are not all that concerned
about how many bushels a producer grows per acre but rather in how many
dollars per acre that fanner produces. We would like to see if we couldn't
devise a program that would have a farmer insure his gross revenue. Al-
though many of the technical points will have to be worked out, what I envi-
sion is a program whereby a producer would be able to insure his minimum
gross income based on perhaps his last 5 >^rs average gross income as
shown on his individual tax fomn.
I would like to thank the Committee for listening to my testimony and
would be happy to answer any questions you may have.
168
minnEsoTn
FnnmERs
union
Office of tfie President
STATEMENT OF
DAVID J. FREDERICKSON, PRESIDENT
MINNESOTA FARMERS UNION
SUBMITTED TO
SUBCOMMITTEE ON ENVIRONMENT,
CREDIT. AND RURAL DEVELOPMENT
UNITED STATES HOUSE OF REPRESENTATIVES
APRIL 5. 1994
LUVERNE. MINNESOTA
600 County Road D West • SuHe 14 • St. Paul. MN 55112-3521 • (612) 639-1223 • FAX (612) 639^)421
169
I want to thank the Chairman and members of the sub-committee for
holding this hearing in Representative Minge's District. The Second
Congressional District was one of the most severely affected by the
flooding of 1993.
The following is written testimony explaining Minnesota Farmers
Union's views on a variety of issues related to crop insurance reform.
1)The adequacy of catastrophic coverage - The current proposal would
provide coverage at 60 percent of the target price, on losses exceeding 50
percent. This yields coverage at $.30/$1.00 of loss in years where the
producer suffers a total loss. This compares to the 1993 disaster
program which paid $.42/$1.00 of loss and the 1992 program which paid
$.19 -$.21/$1.00 of loss, (depending on whether or not the producer had
crop insurance.)
From a lenders perspective, the catastrophic coverage is superior, since
it can be available to producers whether or not they reside in a disaster-
declared county.
If funding permits, it would be helpful to increase the sixty percent to a
figure closer to 100 percent of target price, still using the 50 percent
deductible.
Catastrophic coverage should include coverage for late and prevented
planting, as well as disaster-related quality loss.
2) The processing fee - The processing fee is very reasonable. The draft
language states that the fee will be waived for those who purchase
additional coverage How will this work for those who obtain the
catastrophic level of coverage at the Farm Service Agency, and then obtain
additional coverage through a private agency? Who covers the
reimbursement?
170
-2
3) Mandatory coverage - National Farmers Union supports making coverage
mandatory for farm program participants. However, farmers may have a
different position if the processing fee were to be increased.
4) The dual delivery system - Dual delivery offers producers the option of
where to obtain the catastrophic coverage. It also raises some questions.
Who will do the adjusting? Who will pay the administrative cost if the
producer obtains coverage from both the FSA and the private agent?
5) The use of actual production history (APH) - the use of actual
production history (APH) should make crop insurance a better product for
producers who are at>ove the county average. It should also help in
preventing farmers from farming the program. However, years in which
the producer resided in a disaster - declared area should be excluded from
the APH. This could be accomplished by using the last four non-disaster
years of production history.
6) The requirement to insure all land in the county for a particular crop -
It is appropriate to require a producer to include all land in a county for a
particular crop. However, dry-land crops, e.g. wheat, should not be
averaged in with irrigated crops. These should be separate units.
7) Adequacy of buy-up coverage for insurable crops - Buy-up coverage
should extend higher than the 75 percent election.
8) Provisions of non-insured crops - This question is unclear Does "non-
insured" mean no insurance is available or that the producer chooses not
to purchase insurance? NFU recommends that a producer be required
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to establish production history before being allowed to insure a crop that
has never been planted in previous years. This will guard against
producers farming the program.
9) The amount of premium subsidies at different levels of coverage - If
the goal is to encourage producers to purchase adequate coverage, than a
subsidy should be offered as a percent of the premium, instead of as a flat
dollar amount. The current subsidy, which is the same whether the
producer purchases coverage at the 65 or 75 percent level, encourages
producers to purchase only 65 percent coverage.
10) Likelihood that ad hoc disaster programs will no longer be available -
Farmers Union supports maintaining the Secretary's authority to call for
disaster assistance, if needed, recognizing that these reform provisions
will significantly reduce the need for disaster assistance.
In conclusion, I would like to include for the record the SPECIAL ORDER OF
BUSINESS relating to crop insurance adopted by the deJegates at the
National Farmers Union Convention in March 7. 1994
(Attachment follows:)
172
SPECIAL ORDER OF BUSINESS
Federal Crop Insurance Reform
Adopted by National Farmers Union
March 7. 1994
We commend the Administration for supporting the reform of the
of the Federal Crop Insurance program.
We support provisions which would provide catastrophic coverage as
a benefit of participation in commodity programs or Farmers Home
Administration lending programs.
We support allowing producers to base yield coverage on actual
production history (APH).
We support offering producers assistance to purchase coverage
above the catastrophic level.
We support ottering coverage for late or prevented plantings.
We call on .Congress to make the following additions to the above-
stated provisions.
1. We support increasing catastrophic coverage from the proposed
60 percent of coverage to 100 percent of the expected market price
2 We support allowing producers to exclude disaster years from
APH calculations.
3. We support adding an additional level of coverage higher than the
75 percent level.
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4. We support basing the expected price on the higher of the target
price or the 5 year rolling average of the 12 month market phce.
5. We support requiring insurance companies to offer both APH and
area yield options to producers.
6. We support maintaining the Secretary's authority to call for
disaster assistance, it needed, recognizing that these reform provisions
will significantly reduce the need for di^tster assistance.
174
APRIL 5, 1994
ORAL TESTIMONY OF MIKE CROWLEY
CROP AGENCY, INC.
I would like to thank the Chairman. Congressman Johnson, the
Congressional Committee and Mr. Ken Ackerman for the opportunity to
speak here today.
I farmed for 7 years, worked In the crop insurance industry as a
company representative for several years and for the past 7 years have
worked as an Independent Insurance agent working directly with the
farmer and crop insurance needs. These experiences have allowed me to
observe all aspects of the needs of the farmer regarding the crop
insurance program.
Crop insurance offers our farmers the opportunity to protect
themselves from financial disaster. The existing program needs some
changes in order to meet today's needs. I would like to present some
of the changes that I feel will enhance the program and provide the
necessary disaster protection that today's farmer needs. I will use
the male pronoun, he: although I realize that there are many female
farmers In our area both as independents and partners.
As we look at the existing program in our area, the APH program has
worked fairly well. The problem has been that we have had a number of
years, 1988 and 1993 for example, that have been catastrophe years.
When these two years are figured into the APH calculation the farmer's
ability to insure at adequate levels is greatly reduced. A key factor
for the program to work for the farmer Is that it be set up so that an
adequate amount of protection can be purchased. Due to bad weather
conditions the farmer may be placed in a high loss situation which he
has no control over. The farmer certainly doesn't choose the bad
weather and the loss has nothing to do with his farming practices. I
would like to see the catastrophe years removed from the 1.1 loss
ratio that Is being calculated. If a farmer goes over the 1.1 loss
ratio today, he is subject to the non-standard classification level.
This results in higher rates and higher expenses to him.
In the past few years we have seen a lot of changes in farm size. One
farmer increases his number of acres, another decreases his farm size
and another quits altogether. This presents another problem for the
crop insurance program. This same problem exists for the new farmer
Just beginning his farming career. The new producer and the farmer
increasing his operation is limited to the T-yleld factor. I would
like to see this T-yield factor removed from the calculation and
replaced with a straight ASCS yield. This should apply for 2 to 3
years, allowing the farmer to have adequate protection and to
establish his normal yield protection limit. The program should allow
175
this new land to be insurable at level 3 (75%) during this 2 to 3 year
per i od.
I have several concerns about the new proposed crop Insurance program.
As I now understand it, the proposal Is to give each farmer 50%
coverage for a flat fee of $50.00 per crop or SlOO per county. I feel
that this will give the farmer a false sense of security since It only
covers the bottom level of coverage. Will his banker be willing to
accept this as security? If he chooses the minimum 50% level of
coverage and there is another disaster. I think that there will be
tremendous pressure put on the Federal Government to grant additional
disaster aid. I understand there are additional by-up policies. I
have not seen any costs for these additional by-ups so the question
still remains - will these policies be at a fair price or cost
prohibitive to the farmer. The aim of the new program is to eliminate
the disaster program. It will not happen with the 50% level of
protection. We will have the same program that is currently in force
- but it will have cost more money!
The program also proposes a dual delivery system. These being the new
Farm Service Agency and the independent agent. This will not be
efficient. First of all is the expense of hiring and training the
Farm Service Agency office staff - who will pay this cost
(taxpayers?)! Secondly, it is going to be very confusing to the
farmer to have 2 different delivery systems and explanations of the
program.
Under the current system the farmer pays for his coverage on a
subsidized basis. What is being proposed is to use the disaster
dollars to give him his coverage. It seems that it would make more
sense to use those current dollars (disaster money) each year to shore
up the existing system with adequate protection. Subsidize the 75%
level at a higher rate and most farmers will be properly protected at
a lower cost to the government.
I believe that the producers in our area would rather have a higher
level of coverage at a fair rate. If we could get more producers to
purchase the 75% level of coverage, with 30% subsidies, I believe that
we could make the program more cost effective for the farmer and the
government. The farmer would receive a higher level of coverage. To
make this actuarially sound, we need to have every farmer
participating in the (^rop Insurance Program. With every producer
using crop Insurance, all additional disaster programs would be
e 1 Imi nated.
Another tremendous problem with the proposed system is charging the
farmer a maximum of $100 for the 50% level per county with no regard
to the great differential in farm size. Is it fair to charge the
farmer with 160 acres the same dollars as the farmer with 800 acres?
The exposure to the government and tax payer is much larger with the
large farm. Need - for the farmer in disaster relief may be the same
or greater. Each farmer/producer should be obligated to pay his
share .
176
In summary, v/hat I really feel needs to be accomplished with the crop
insurance program Is increased guarantees and the use of subsidy
dollars to Improve the current program. Today's farmer is willing to
pay his fair share - if he is getting adequate protection. He doesn't
want a 'free program' that still leaves him with a great deal of
uncertainty. He deals with uncertainty every day when he checks the
weather! We need to provide these valuable business people with
guaranteed protection, at a reasonable premium - with a workable
system. I ask for your support in not creating another area for
Federal bureaucracy and control. Allow the farmer choices and
opportunities - and most importantly, essential support. I ask you to
use existing dollars to modify the current system into one that is
equitible and fair to all. This will Include the farmer and all U.S.
ci t izens.
Thank you for allowing me this time to speak to you. I appreciate the
opportunity to present my ideas and thoughts on this very important
issue .
(Actachment follows:)
177
TO: COMMITTEE ON AGRICULTURE
SUBCOMMITTEE ON ENVIRONMENT, CREDIT AND RURAL DEVELOPMENT
FROM: MIKE CROWLEY
CROP AGENCY. INC.
1508 N. DOUGLAS
WORTHINGTON MN 56187
TELEPHONE: (507)372-741 1
REGARDING: WRITTEN TESTIMONY ON VARIOUS ISSUES ADDRESSED IN THE MARCH
18, 1994 LETTER AND APRIL 5, 1994 HEARING DEALING WITH THE FEDERAL
CROP INSURANCE REFORM ACT OF 1994
1. ADEQUACY OF CATASTROPHIC COVERAGE FOR INSURABLE CROPS Coverage
is available to the farmer at this time but the complaint that we hear
most often Is that the coverage Is not enough. The current coverage
will cover most production expenses but in the unpredictable business
of farming this level of protection may not be enough to keep him In
business. What the farmer wants is a higher guarantee level which
should probably be 85% of their normal guarantee. Today most farmers
only purchase the level 2 coverage at 65% of their guarantee at the
price election. If they could purchase 75 to 85% of their guarantee
at the same subsidized rate as level 1 and 2 they would be able to
afford the coverage. Level 1 and 2 are subsidized by 30%, level 3 is
subsidized at approximately 15%. With a subsidy of 30% on the level 3
most farmers would carry level 3 rather than level 2. This would
insure them at 75% of their APH. If the farmer is insured at level 3
(75%) lt_gr_eatly reduces the need for a disaster program.
2. PROCESSING FEE OF »50 PER PRODUCER PER CROP PER COUNTY, NOT TO
EXCEED »100 PER PRODUCER PER COUNTY This is one of the most unfair
items proposed in the new crop insurance program. If you have 160
acres or 800 acres you pay the same *100. Does this make sense? I
don't think so. The potential exposure is not the same at all.
Consider this: if the 160 acre farm has a total disaster and is paid
the maximum on 80 acres of corn and 80 acres of beans he would receive
«23.280. If he had 800 acres <400 acres corn and 400 acres beans) he
would receive $116,400. This makes no sense at all.
3. REQUIREMENT THAT PRODUCERS MUST OBTAIN CATASTROPHIC COVERAGE TO BE
ELIGIBLE FOR PRICE SUPPORT, PRODUCTION ADJUSTMENT AND CONSERVATION
PROGRAMS This Is Important as It provides the vehicle that Insures a
very high level of participation In the crop Insurance program. For
example. Nobles County In Minnesota has a high level of participation
and a large amount of premium has been collected over the years. When
large losses occur such as in 1993 an adequate amount of money has
been collected over the years to pay for the losses. By having a
large percentage of participation this will help to make the program
actuarially sound. If all farmers nationwide are required to purchase
crop Insurance coverage on at least level 2 (65%) there would be a
great deal of money coming Into the program. This would reduce the
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amount of money needed from the government to subsidize the program.
Participation could perhaps be monitored by having an area on tax
returns to mark - YES, I purchase crop Insurance; NO, I do not
purchase crop Insurance. I feel that we need less, not more
government intervention in the crop insurance program but using the
tax return could help to insure 100% participation.
4. DUAL DELIVERY SYSTEM: CATASTROPHIC COVERAGE MAY BE PURCHASED
EITHER AT USDA SERVICE CENTERS OR THROUGH PRIVATE INSURANCE AGENCTS;
ADDITIONAL COVERAGE MAY BE PURCHASED ONLY FROM PRIVATE AGENTS I
really feel that this would be a very bad system. A dual delivery
system Just will not work. It would be Inefficient, costly and
confusing. The Farm Service Agency (ASCS) currently has it's hands
full providing adequate service to the farmer. With the additional
responsibility of crop Insurance It would be necessary to hire more
employees. Currently crop insurance is handled by independent agents
and staff. As an example of the work force needed to service crop
insurance I will outline my agency. I work full time servicing only
crop insurance. I have one additional full time agent/service
representative and 3 parttime employees. Crop Insurance is the only
thing we work with. A high level of knowledge and expert ice is
necessary because we are working with a farmer's source of livelihood.
Further, there are many other agencies In Nobles County that sell and
service crop insurance on a full or parttime basis. The total number
of people needed to handle crop insurance is very high. How many
additional employees are you willing to hire and pay to handle the
proposed program? Who will bear this tremendous cost? Are you
willing to put many independent agencies out of business and thousands
of employees out of their Jobs? This will reduce tax revenue.
5. USE OF ACTUAL PRODUCTION HISTORY (APH) FOR THE 4 PREVIOUS CROP
YEARS, BUILDING UP TO 10 YEARS, AND THE USE OF TRANSITIONAL YIELDS
(T-YIELDS) IF APH IS NOT AVAILABLE I believe in the Actual
Production History (APH) and I feel that the 4 year average building
up to 10 years would be fair. I would like to see the transitional
yields (T-yields) removed and replaced with the full ASCS yield or
some form of transferring yield history from one producer to another
based on similar ASCS yields and soil conditions.
6. REQUIREMENT FOR PRODUCERS TO INSURE ALL LAND IN THE COUNTY FOR A
PARTICULAR CROP All acres of a particular crop should be insured.
This helps to make the program actuarially sound. For example: You
farm 600 acres. 400 acres are well tiled, excellent farm ground but
the other 200 acres are marginal to poor land. You don't expect a
loss on the good acres but the poor acres are questionable so you
insure only the marginal 200 acres.
7. ADEQUACY OF THE BUY-UP COVERAGE FOR INSURABLE CROPS With the
proposed program it is my understanding that the farmer will get 50%
coverage at virtually no cost. There supposedly is going to be some
subsidy for additional coverage (if purchased) but there is currently
no information available telling us what this amount is going to be.
If additional coverage is cost prohibitive - no farmers will purchase
it. You must have a high level of participation, providing a
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relatively high gwarantee In order to provide security. This Is the
only way the program could work.
8. PROVISIONS FOR NONINSURED CROPS In our area the most Important
are the main cash crops - corn, soybeans, wheat. Many other crops
should be considered - alfalfa, etc. All major crops should be
Included.
9. AMOUNT OF THE PREMIUM SUBSIDIES AT DIFFERENT LEVELS OF COVERAGE
The subsidy Is currently 30% at the 50% level 1 and 30% at the level 2
coverage. When you go to level 3 the percent of subsidy Is
approximately 15%. Once again, you must encourage a high level of
participation at the highest possible level. To do this you allow the
same subsidy as level 3.
10. LIKELIHOOD THAT AD HOC DISASTER PROGRAMS WILL NO LONGER BE
AVAILABLE I think that the largest problem with participation in the
existing program is the fact that the government has repeatedly stated
that the only assistance available will be the Federal Crop Insurance
Program. Farmers do not believe this. Whenever there has been a
major crop failure the government has stepped in with disaster
payments. Why purchase protection? If Congress would pass a law that
the only assistance available will be the subsidy to the Crop
Insurance Program and there will be no disaster payments you would
have much higher participation.
11. EXPENSE REIMBURSEMENT FORMULA FOR PRIVATE INSURANCE COMPANIES
Both state and federal government provides subsidies for many high
risk programs - Federal Flood Insurance, Assigned Risk Workers'
Compensation, Assigned Risk Automobile Insurance, etc. All private
Insurance companies must purchase Reinsurance on any lines of
insurance that have high exposure. There is tremendous exposure in a
crop insurance program so it is mandatory for the federal government
to provide some type of reinsurance. I don't, know what the level
should be but if you would require 100% participation by farmers the
cost would be much lower.
12. PROVISION TO ALLOW PRIVATE INSURANCE COMPANIES TO LOWER THE RATES
CHARGED TO PRODUCERS, SUBJECT TO FCIC APPROVAL I don't believe that
private companies should be allowed to lower their rates. If you
require 100% participation the loss ratio will greatly improve and the
subsidy can be lowered. If you allow private companies to set their
own rates you will have some that will set rates too low In order to
sell policies. Over a period of time they will suffer great financial
di f f Icul i t ies - possibly going out of business and creating additional
problems for insureds and the government. Insurance companies. Just
as any other business, must have adequate pricing to stay in business.
Adequate, reasonable pricing and good service will guarantee that a
company will be in business in the future.
13. NON-STANDARD CLASSIFICATION SYSTEM The non-standard
classification is not fair to a farmer. He has no control over
adverse weather conditions that may occur. However, there should be
more scrutiny and retribution for poor farming practices.
180
14. GROUP RISK PLAN This coverage should not be available.
15. MARKET VALUE PROTECTION PLAN I have no information on this
plan.
I ask that you consider these additional points:
a) The current system is the best system to continue to
provide crop Insurance to our farmers. There is room for
improvement so that it provides better protection. I feel
that effort should be put into Improving the current program
- not designing a new program that appears to be totally
unworkable .
b) The proposed new program will be extremely costly to the
government and taxpayers.
c> The proposed program will give the farmer much less
secur i ty .
Thank you for this opportunity to express my concerns and ideas
regarding the crop insurance program. I would be happy to discuss any
questions you have regarding my statements.
Si ncerel y ,
/J
Mike Crowley
STATEMENT
National Association
OF
Professional
Insurance Agents
"THE FEDERAL CROP INSURANCE REFORM ACT OF 1994"
Presented by:
Donald R. Marin, CIC
Marin-Biel Insurance, inc.
Sdby, Soudi Dakota
Field Hearing at the VFW Hall, Luverne, Minnesota
April S, 1994
MnOHU
400 North Washington St
Alexandria, VA 22314-9980
703/836-9340 • Fax 703/836-1279
Representing more than 180,000 independent insurance agents, brokers and their employees
182
I am Don Marin. I am an independent agent and owner of a smaD insurance agency in
Sdby, South Dakota. I iiave iieen in the crop insurance business for over 13 years.
All my crop insurance business is witii reinsured companies. I am here representing
the National Association of Professional Insurance Agents (PIA National).
PIA National is a nonprofit trade association representing more flian 180,000 independent
insurance agents and brokers and their employees who sell and service all lines of
insurance, specializing in coverage for homes, auto and business. PIA National has
members in each state participating in the Federal Crop Insurance program by selling
FCIC-reinsured multiple peril crop insurance. Hiey also sell hafl insurance and can
provide farmers and ranchers with a broad range of insurance coverages taflored to meet
their dients' needs.
PIA National commends the Subcommittee on Environment, Credit and Rural Development
of the House Committee on Agriculture for holding this field hearing. We welcome this
opportunity to present our positions and observations on various aspects of the Federal
Crop Insurance Program.
On the adequacy of catastrophic coverage for insurance crops
The USDA's proposal would provide a basic level of coverage against catastrophic
loss at no cost to fanners except for a processing fee of $50 per policy or $100 per
farmer. Hie processing fee could be waived if the farmer has limited resources.
Y/e believe that the catastrophic coverage is better tiian no coverage. However,
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we believe the coverage is inadequate to cover farmers' expenses in some cases. Crops are
subject to many hazards over which farmers have no control. Even in the best producing
years, thousands of crop acres are totally or partially destroyed by bad weather, insects and
disease.
On the $50 processing fee per producer per crop per county, not to exceed $100
I personally fed the processing fee should be higher to compensate for the
paperwork or at least elimination of the maximum of $100 if they have more than two
crops per county. I suggest a minimum of $50 per crop or possibly $100 for first crop and
$50 for each additional crop.
On the requirement that producers obtain catastrophic coverage to be eligible for price
support, production adjustment and conservation programs
Considering the current program participation affected by producers reliance on ad
hoc disaster assistance, we bdieve the catastrophic coverage has to be part of the reform
package for the program to succeed.
On the dual delivery system
As you would expect, this issue is dear to our hearts as independent insurance agents.
As I suggested to Secretary Espy when we met with him in Washington, it would
be better for the farmer if they first went to an independent insurance agent so that the
entire program including costs could be explained. Then, the farmer would be given a
voucher or certificate by the agent, noting his purchase of the catastrophic coverage
184
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and/or higher levels of coverage.
The largest strength of the current crop insurance prc^ram structure is that it relies
on the private sector almost exclusively for the delivery of die at>p insurance product A
network of over 68,000 individuals in the private sector currendy earn part or all of their
income through the sale and service of Federally-rdnsured crop insurance. This labor force
not only provides the farmer-customer with convenient, dose-to-home access to crop
insurance, it also provides a tremendous boost to rural development
In terms of convenience to the farmer, as USDA proceeds to consolidate and relocate
offices, the local crop insurance agent will probably be mudi doser and more convenient
to the fanner than the new Farm Service Agency (FSA) office. In addition, agents make
house calls; farmers need not stand in line at an FSA office.
PIA believes that FSA will never be able to provide die kind of personal service that
is the hallmark of insurance agents. Professional, consumer-oriented agents wiD survive
and succeed in their competition with banks, and this time, with die Feds, by doing what
they have always done — serving the needs of thdr clients.
On the use of actual production history (APH) for the 4 previous crop years, building to
10 years and the use of transitional yidds (T-yields)
My comment here is that anyone who has not been in the Crop Insurance Program
before and cannot prove his yields would only get 65% of their T-yield and diat does not
185
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make it a very good program for them in the first 3 years, until they can get a proven
yield built up. This would not be an incentive to enter the program, when our objective is
to get more participation.
On the requirement for producers to insure all land in the county for a particular crop
We believe this is a necessary requirement since our goal is increased program
participation and better protection of farmers by encouraging them to buy crop insurance,
which is true risk management
On the adequacy of the bpy-DP coverage for insurable crops
Once we get more partidpation, with up to 85% of their proven yield available in
the new Crop Insurance Reform Act of 1994, will give the farmers adequate coverage for
his fanning operations.
PIA also believes that this provision of the reform package should be taken by the
insurance industry, reinsurance companies espedaOy, as a challenge to develop
supplemental coverages that agents could sell to their farmer-dients.
On the provisions for noninsnred crops
We believe the Federal Crop Insurance Corporation diould consider expanding the
list of program crops beyond the m^jor crops produced in the country including "specialty
crops."
186
On the amount of premium subsidy at levels of coverage
For farmers to be adequately protected, crop insurance must be sold, even if a
portion is given away for little or no diarge. We would have preferred to see the
catastrophic level lower, such as 25% or 35%, and more subsidy put into the higher levds
of coverage to encourage more participation. Buying into the Federal Crop Insurance
Program is a business decision. With adequate coverage and acceptable pricing, you're
going to be able to sell the program because today's farmers recognize more than ever that
they put more risk in one year than farmers ever had in the past so it is less likely that
the farmers will say we'll wait untfl next year. Farmers have to make every year count.
Unless you provide federal crop insurance, you're not going to allow every farmer to gain
that protection.
On the likelihood that ad hoc disaster program will no longer be available
Congress should consider the recent numerous catastrophic events in the country
as a "wake-up call" for ending ad hoc disaster payments. Whfle political realities are
that Members of Congress are often times elected by their constituents throu^ their
assistance in disaster programs, our dwindling Federal dollars and the difficulty of
"finding" disaster funds, magnifies the importance of crop insurance.
For us agents who are on the firont-line in the sale of crop insurance, the availability
of ad hoc disaster payments is the Number One disincentive for farmers to buy crop
insurance. This is also our experience in selling Federal flood insurance.
187
PIA NatiMial fully support efTorts to reduce or better still, efiminate ad hoc disaster
assistance. Ad hoc disaster bills can be bad both for farmers and taxpayers.
On die expense reimbursement formula for private insurance compames
This is a sensitive issue for agents because in most cases, agents commissions are
dependent on private reinsured companies expense reimbursemenL 1 would like to address
this subject by mentioning some of the disincentives which discourage agents from sdling
crop insurance. Paperwork is horrendous. Regulations are constantly dialing and
insurance deadlines are often times hard to meeL These factors increase the agents*
cxposorc to errors and omissions liability. And most of aD, farmers are tough clients to
scO. It's harder to sdl them crop insurance because farmers are confident that in the event
of a disaster, the federal government would provide relief regardless of whether a farmer
had insurance or not
Another mqjor disincentive is die unpredictaMlitv of the Federal Crop Insurance
Program in terms of program funding which ultimately affects insurance agents'
commissions. PIA National believes dnt the "dwindling" expense reimbursements could
affect the insurance industry's ability to assist in reforming this federal program.
Personally, I don't think the reimbursement should be lower than the current 31%.
The <^>eraling expense ratio for die property/casualty industry averages between 25% to
35%, so 31 % is in the middle/upper range.
81-128 0-94-7
188
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On the provision to allow private insurance companies to lower flie rates charged to
producers, subject to FCIC approval
While we advocate "cost through market forces" or a market base mechanism rather
than government edict, we have some reservations on allowing insurance companies to
lower the rates. Hie principle may look good, but in the long run, it could limit
competition in the marketplace to the disadvantage of smaDer companies. Selective
marketing and "dierry-picking" could easfly result in company insolvency and this wiD
be very detrimental to the program.
On the non-standard dassiBcation system
PIA supports efforts to eliminate "abuses" to the Federal Crop Insurance Program.
However, this needs to be looked at dosely because there are cases where some states
have had 8 out of 10 years drought, and we don't beUeve people should have their yidds
cut and their premiums raised, because of an Act of God. Many of the hazards faced by
farmers — floods, droughts and other natural disasters — not only are largdy beyond their
control, but most are not subject to coverage by private sector insurance because of their
catastrophic nature.
On the Group Risk Plan
The Group Risk Plan (GRP) is a new risk management tool devdoped by the FCIC.
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It is another choice for fanners. If unhappy with the Multiple Peril Crop Insurance, GRP
could work for them. GRP is not for everybody but for us agents, it is another
insurance product we can sdH; a "door opener" for die sale of other property/casualty
products. More choices for the fanners, the better.
On die market value protection plan
We support this plan because it wiD benefit die farmers individually and the over-all
program wiD be improved because adequate rates wiD be charged.
In oondusion, PIA National's: ^^
* M^or concern at this time is to get the Federal Crop Insurance Program
adequately funded so that reform of this program can occur.
* Believes that this program is a program designed first and foremost to
protect die American fanner. Farmers participating in the program
enhance the stability of the economy in a given agricultural area.
* Believes that mqjor improvements to this federal insurance program have
been passible because of the government and private industry partnership.
It is PIA National's belief that a key to the success ot the Federal Crop
Insunince Program is the maximum possible use by the FCIC of die private
insurance sector.
* We oontinne to stand ready to work with Congress, the VS. Department of
Agriculture and other agencies to protect the American farmer by providing
190
the necessary insuranoe coverage to protect the stability of our local
and national economy.
Mr. Chairman, we need your help and support of the Federal Crop Insurance
Program. While not perfect, crop insurance works.
LMA/3i/30/94
HEARING OF THE HOUSE COMMITTEE ON AGRICULTURE
Subcommittee on Environment, Credit and Rural Development
April 5, 1994, Luverne MN
Steve Lindholm, President
Farmers & Merchants State Bank of Clarkfield
F&M Insurance Agency
940 10th Avenue
PO Box 248
Clarkfield, MN 56223
I support the Administrations Crop Insurance Proposal - The Federal
Crop Insurance Reform Act of 1994.
In my view, the effort to reform the crop insurance program by
providing catastrophic coverage on an individual farm basis and
eliminate or at least substantially reduce ad hoc disaster programs
is a good move for America's farmers and a good move for the
American public. It will provide farmers and lenders with
protection they can rely on and it will be cost effective for tax
payers .
It is imperative that the House/ Senate Budget Conference Committee
adopt the Administrations recommendation to transfer one billion
dollars to "on-budget" for crop insurance reform when they meet the
week of April 10. Inadequate funding of crop insurance reform
would be a case of killing the goose that lays the golden egg.
There is a direct relationship between a sound crop insurance
program and the availability of a plentiful, low cost supply of
food for the American public. The ability to insure crops is
fundamental to farmers ability to obtain substantial credit
necessary to grow and harvest crops that are so vulnerable to
natural disaster. With a sound crop insurance program, the U.S.
faunner will continue to produce crops more efficiently and in more
abundance than anywhere else in the world.
Please carefully consider all suggestions that could improve the
proposal. The following comments will specifically address issues
upon which I was asked to comment.
1. The adequacy of catastrophic coverage. It's my understanding
that this coverage of 50 percent of the proven yield times 60
percent of the established price approximates the average net
disaster payments. It has some validity from that standpoint.
However from a risk management stand point it will be inadequate
for most farmers. Therefore, every effort should be made to
provide both counseling and incentives for growers to buy-up this
coverage to more meaningful amounts of protection.
192
2. The catastrophic coverage processing fee of $50 per crop not
to exceed SlOO per grower per county. This fee apparently is
intended to represent a producer paid administration fee rather
than a premium charge. This will be affordable for most producers.
The adequacy of this fee to cover administrative costs will depend
largely on the extent "that USDA/FCIC permits the private sector to
streamline and simplify the program, its administrative processes,
and its presentation to growers. The simplicity of the private
crop hail programs can be used as a model for the reformed crop
insurance program.
3 . The requirement that producers be required to obtain at least
catastrophic coverage to be eligible to participate in price
support and loan programs. Personally I feel that the small $50-
$100 cost of the basis coverage is so reasonable that ad hoc
disaster payments should not be necessary for those who would not
take catastrophic coverage on a voluntary basis. If, however, the
requirement is politically necessary to be sure there will be very
few if any ad hoc disaster payments for crops in the future, I can
accept it as a requirement .
4. The dual delivery system with catastrophic protection
available from both private insurance agents or the USDA service
centers and additional coverage being available only through
private agents. I fully endorse maximum use of the private
insurance agents and companies for several reasons.
First, private agents are experienced risk management counselors
who will evaluate crop insurance protection and make
recommendations that best address the needs of individual
producers. Since I believe the basic coverage is inadequate for
most producers, it is critical they be required, as a minimum, to
go to a private agent for a full review of the coverage choices
available to them before they buy the minimum coverage from the
government office.
Secondly, the government service offices are already challenged to
administer farmer programs without the additional burden of issuing
crop insurance policies. Local USDA offices are being asked to get
along with fewer personnel and yet the work load and documentation
required to deliver government services is increasing. They would
be asked to issue catastrophic crop insurance policies at the scime
time they are under the gun to complete spring sign up for farmer
programs. If they are burdened with issuing crop insxirance
policies, they might have trouble getting the job done or errors
may increase substantially.
Last, to duplicate the current private sector services in a
government office is unnecessary and will cost taxpayers a high
price.
I strongly recommend that the use of government offices to sell
crop insurance be limited to only those geographical areas where
private insurance agents are not available.
193
5. The use of actual production history fAPH) to establish
coverage . This approach provides more equitable coverage than
using farm program yields when actual yield records are available.
Every effort and incentive should be provided to make actual
records available. 'Also, the rules should favor the use of
previous yield records the producer has had a part in making on
another farm or in another county.
When less than 4 years of records are available I recommend that
transitional yield (T-yield) be eliminated and the full ASCS yield
be used in calculating the bushel guarantee. The current APH rules
reduce yields in our area to approximately 85% of ASCS yields
before bushel guarantees are calculated. ASCS yields are already
10-20% below normal production, for our area. As a result, a
farmer who must use T-yields will only receive approximately 40%
coverage at Level II (which is designed to provide 65% protection)
until records are available. The current T-yield formula does
prevent some beginning farmers and farmers who are teOcing on new
land from being able to obtain adequate protection.
Livestock producers especially cattle feeders, are at a
disadvantage in producing records because they often don't have an
effective way to measure yields on crops that are fed. They should
also be able to use more realistic yields than T-yields to
establish bushel guarantees when they are unable to provide
adequate records.
6. Requiring that the producer insure all land of a crop in the
county . This approach is part of the current program and is a
sound basis for insurance.
7. Adequacy of buy-up coverage for insurable crops. This may be
adequate for many growers. However, two deficient situations
should be recognized. First, certain producers, especially
beginning farmers who are highly leveraged may need more than 75
percent coverage. I recognize that the reform proposal allows up
to 85 percent coverage and I hope that FCIC will give producers an
opportunity to buy it at premiums that are affordable.
Second, we need to recognize that farmers have more coverage today
vmder disaster payments and crop insurance than they would have
under the reformed program. This should be addressed by giving
producers the opportunity to buy a supplemental product that would
increase the rate of payment perhaps after the producer suffers a
loss of 50 percent or more. A provision of this nature was part of
the 1988 disaster program and is included in most private crop hail
policies. This could be a very cost-effective way to address this
issue and could probably be done by the private sector with the
backing of federal reinsurance at reasonable rates.
We need to do everything we can to increase insurance protection
available.
194
8 . Adequacy of protection for non-insured crops. Livestock
producers in our area have difficulty obtaining coverage for some
forage crops. Any additional crops that can be included in the
program would be an improvement from the ad hoc system.
9 . The amount of premium subsidy at the different levels. The
more subsidy the lower the farmer's cost and the more they will
buy. For example, more producers would buy 75 percent coverage if
it had a higher subsidy and less cost. Every effort should be made
to provide incentives for producers to increase coverage to more
adequate levels of protection.
10. The likelihood that ad hoc disaster programs will no longer be
available. If we can assume that USDA's estimates are accurate
that 80 percent of the producers will be protected (about the same
as under current disaster programs) and that higher legislative
hurdles will make it more difficult to pass future ad hoc disaster
programs, there should be fewer such programs in the future. This
will be the result of both reduced need and increased difficulty to
pass them.
11. The adequacy of the expense formula for private companies. I
am not the expert here but I will share a few thoughts. Over the
last few years the number of private companies in the business has
declined by over 50 percent which could indicate that margins are
pretty thin. I also know that each year FCIC adds more
requirements for companies while reducing the expense rates. This
cannot go on indefinitely. I recommend that FCIC with the private
sector conduct a thorough review of program design and
administration with a primary emphasis on simplification and
reduction of administrative cost at all levels. The private crop
hail program is a model to look at for simplification and
efficiency.
If the program was simplified the expense formulas may be adequate.
12. Authority for rate competition between private companies with
FCIC approval. Competition is the foundation of our free
enterprise system. It should be permitted here too. FCIC must
make sure that companies maintain adequate financial reserves to
avoid insolvencies.
13. Non-standard classification system. This underwriting system
is strong medicine when a grower, through no fault of their own,
has a series of disasters. Compassion should be a part of the
system. I do not think non-standard classification should apply to
the catastrophic coverage. In other words, producers with a high
frequency of losses might fall to the safety net of catastrophic
coverage, but they should never fall through the safety net.
14. The group risk plan. This plan is OK as an option, but it
should never be the only form of coverage available. It is not an
effective risk management tool to use in the granting of loans
195
because a widespread catastrophe must occur before the producer
qualifies for a loss payment. If no widespread disaster occurs,
the individual fanner who experiences a crop failure would not be
protected.
15. Market value protrection. This is a good concept that ties the
price election to the market place. This also provides more
protection for growers who forward sell or hedge their crops during
the growing season. I encourage FCIC to maJce much broader use of
their authority to back private sector initiatives like this.
I would also like to see an increasing payment provision
implemented by the private companies with PCIC's reinsurance to
provide similar indemnity that is available under the current
program where MPCI and disaster programs combined provide
protection up to the ASCS yield times the price.
Occasionally I read or hear comments from Washington and at home
about the crop insurance program not working very well or that it
costs too much. I do not share that view. I believe the current
program works relatively well but can be improved in terms of
increasing available coverage and reducing administrative costs.
It would be very wrong to think of crop insiurance subsidies as a
"give away" program. I believe the amount by which crop insurance
progriun costs exceed premiums paid represents a very small
investment of tax dollars for a very substantial return.
Please keep up the important work of improving crop insiurance.
Thank you Congressman Hinge and the rest of the committee members
for holding this hearing and inviting our comments.
i^
196
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Statement of Gene Smestad
Director of Crop Insurance
Farm Credit Services of Fargo, ACA
CROP INSURANCE HEARING
April 5, 1994
Luveme, Minnesota
It is my pleasure to have the opportunity to participate as a witness today. My
testimony will be qualified to the extent that I became a licensed insurance agent
27 years ago, have been participating in farming and purchasing crop insurance
products for 21 years, and as an employee of Farm Credit Services of Fargo, ACA
my responsibilities include directing the crop insurance program in a 9 county area
in southeastern North Dakota.
When congress passed the 1980 Federal Crop Insurance legislation, they did it for
all of the right reasons -
1. Provide risk protection to farmers at optional levels.
2. Include private industry in the delivery system so as to increase
participation.
Additionally, the reformed FCIC program was intended to eliminate the need for
disaster legislation AND eliminate subsidization to the program over time. This
was indeed a visionary expectation which could only be achieved if the MPCI
product had "value" in the eyes of the producer /purchaser. To date, it has not had
enough "value" to increase participation to expected levels.
198
Crop Insurance Hearing
Gene Smestad Stmt.
April 5, 1994
Page 2
Why hasn't this happened? Let me offer a couple of thoughts -
Thought #1 - FCIC remained in charge. They established program direction,
administration and reviews. The important question here is
"what incentive did they have to aggressively step up to the
plate and make the changes necessary to meet the expectations
of the 1980 legislation?
Thought #2 - Insurance companies contracted with FCIC and ran a cost plus,
risk free business until 1989 when the element of real risk
sharing was included in their contracts. Prior to 1989, there
was little incentive to lead the charge in product enhancement.
FCIC has recently been reducing the Expense Reimbursement
contracts with it's reinsureds, causing companies to pull back
from developing added products as they search for means to
remain profitable and gain reinsurance for the added products.
The Interim Report of the Commission for the Improvement of the Federal Crop
Insurance Program, dated April 3, 1989, contains a summary of recommendations
that would have greatly enhanced the present product. Those recommendations
were the result of hearings throughout the United States. It is my belief that the
hearings identified the issues, but because of the administrative structure of FCIC
and the initial contracts with the private companies, changes were too slow in
coming. As a result, we have had considerably more disaster legislation and red
ink - - all at a time when Washington is trying to balance their checkbook.
So here we are today, some 13 years since the 1980 legislation. With knife in
hand, we are about to perform some major "reform surgery". The basic proposal
begins with a "something for nothing" coverage with the option to purchase
additional coverage. The expectations of this reform are identical to that of the
1980 legislation - which we recall were, 1) greater participation, 2) eliminate
disaster legislation, and 3) actuarially sound.
199
Crop Insurance Hearing
Gene Smestad Stmt.
April 5, 1994
Page 3
Although this proposal would not have been my first choice, it may well be the
only way toward product enhancement. Private companies, driven by business
fundamentals of profits and market share, will now develop products that the
customer perceives to have "value".
So what are some of the issues open for debate:
Issue #1 - Dual delivery system:
History clearly demonstrates the inability to lace marketing and
servicing incentives into a governmental delivery system. Only
private agents will have the incentive to provide the product
counseling necessary to assure good risk management
participation. Additionally, when the agents personal success
is based upon farmer participation, there will exist an automatic
incentive to improve product value so that the sales materialize.
Greater participation is an expectation of this reform —
increasing product value is the only path towards increased
participation.
Efforts should be made to increase industry's role and
responsibility in the delivery and marketing system rather than
pay the government to come back in as a player.
Issue #2 - Group Risk Plan:
This is clearly another attempt to provide something less in
value to save budget. All of us buy insurance and we buy
individual coverage to match our risk management needs. The
present APH approach provides for individual coverage which
can be measured in specific dollars of protection. GRP cannot
be measured until the year is over. It could be a bonus or a
ticket out of farming. It is a dangerous option to promote if we
are truly concerned about providing risk management insurance
to fanners.
200
Crop Insurance Hearing
Gene Smestad Stmt.
April 5, 1994
Page 4
The implications of not having individual coverage will shrink
some operators credit limits with their respective lender.
Buying a product which provides no measurable protection
value is like shooting craps -- it simply does not reconcile with
sound business judgement.
Under a dual delivery system, I wonder what incentive an
ASCS office employee would have to truly evaluate this option
with a farmer.
Issue #3 - APH calculation.
This is a good approach to individual protection and the 1994
enhancement was good to see. However, further enhancements
would increase product value. Enhancement #1 would be to
limit catastrophic loss years to the T-yield. Enhancement #2
would be to keep that catastrophic loss from the rate base data.
The purpose of these two enhancements would be to prevent
product value deterioration and prevent increased product price
relative to value.
Without these enhancements, it is doubtful that product value
will increase to the desired levels. A farmer can buy $100 of
hail coverage per acre, incur a total loss and the next year he
can again buy $100/acre of protection. However, with MPCI,
the total loss will diminish the amount of coverage he can
purchase the following year. This identifies a product
deficiency as his expenses and risk protection needs will not
diminish.
Issue #4 - Cheaper theory:
Proponents of this reform are saying that the additional
insurance the farmer buys above the "something for nothing"
line could be less expensive as a result of more participation.
This is doubtful. We must increase product value to get
participation and product value will have added price if it is to
be actuarially sound.
201
Crop Insurance Hearing
Gene Smestad Stmt.
April 5, 1994
Page 5
Let's get away from believing we can sell a poor product just
because it is cheap. History proves this is not possible.
Instead, let's improve the product and price it according to
value. Farmers are very large buyers of value products ~ they
will make good business decisions if the product options are
available.
Issue #5 - Adverse selection is thought to be a function of "Knowing
disaster legislation will be available".
As a farm owner who buys MPCI, and as a lender who sets up
farm operating lines of credit, I see adverse selection as a direct
function of perceived product value. That is why participation
varies by crop and geographic area.
If product value is increased, the size of the risk pool will
increase, and adverse selection will decrease.
Issue #6 - Role of FCIC
Simply stated, they must not be a roadblock to private
industry's attempt to develop and market products of increased
value. Allowing them to establish a presence at the county
level, as proposed, would be a mistake. That would be
building another cost structure that would defer dollars away
from enhancing product value.
FCIC must move faster in both approving and reinsuring added
products so as to be a more accommodating player in program
enhancements. Private industry needs this type of cooperation
if reform expectations are to be accomplished.
202
Crop Insurance Hearing
Gene Smestad Stmt.
April 5, 1994 ^
Page 6 \
Conclusion
We are again standing at the gate of opportunity in regards to improving risk
management tools for agriculture.
If this reform gets caught up strictly in the emotion of cutting costs, it will fail
everyone. The focus must be to bring business principals to an enhanced risk
management product which can measurably protect production agriculture.
If we promote single delivery by private industry - if we promote the development
of products with true and measurable value ~ if we enhance the APH formula to
limit product value deterioration ~ and if we promote an American free enterprise
spirit to the above process ~ we will have a chance at achieving reform
expectations.
Good luck in your continued efforts ~ it's been my pleasure.
Eugene C. Smestad,
Farm Credit Services
Box 1025
Valley City, ND 58072
1-701-845-1751
Fax 701-845-5690
203
John R. Keister
P.O. Box 340
Blue Earth, MN 56013
Ph: 507-526-7394 ' ' ' ^
Mr Chairman: _.
There are three areas that I feel must be addressed in any
revision of the Federal Crop Insurance act. Before I address
these revisions I would like to state my support for the Federal
Crop Insurance program. In the last fifteen years this prograun
has evolved into a good progrcun that basicly delivers what the
current legislation intended it to do. I believe that most
everyone agrees that new legislation must be enacted to make
Federal Crop Insurance universally acceptable.
My first recommendation is the new legislation must clearly
define Federal Crop Insurance's role. Current legislation does
not allow for the flexibility that is currently demanded of
Multiperil Crop insurance. Along with a clearly defined role,
the legislation must redefine the position of the manager of the
Federal Crop Insurance Corporation. The managers position should
be changed from a political appointment to a permanent position.
The revolving door of managers of the last fifteen years has . ._ ,
significantly harmed the program. We cannot have a consistant
progrcun without clear leadership. Relationships between private
companies and the Federal Crop Insurance Corporation have been
strained because of this turn over. With a permanent manager
long term relationships can be established and a spirit of
cooperation will have a better chance of prevailing. The manager
204
must have the ability to implement progreuns and procedures within
a much shorter time frame.
The current system of publishing a procedure before it is
implemented does not allow for the program to react to changes in
farm economics. A clear example of this was Federal Crop
Insurance Corporation's failure to revise its coarse grain
quality adjustment procedure. This failure of action resulted in
the policy holder making a decision based on information that he
was given in good faith and later being penalized by Federal
Crop Insurance Corporation's clarification of an old procedure.
This clarification penalized the farmer for a grain buying
practice that was beyond his control. A strong managers
position would not have allowed this situation to happen.
My second recommendation is to allow coverage to be raised
to cover cost of production. I do not believe that the current
maximum level of 75% of a farmers yield should be raised. I do
believe that the dollar amount of coverage per bushel is not
adequate. I do not subscribe to the theory that raising the
price election above market price causes a moral hazard. The
past practice of allowing a farmer to collect both Federal Crop
Insurance and disaster payments has in effect allowed the same
thing. There are many procedures that can be easily adopted to
prevent the small percentage of farmers from abusing the program.
205
Until we allow coverage that will act as collateral and
subordinate a loan we will always receive pressure to enact
disaster legislation. The availability of this coverage is
primary over price of the coverage or the eunount of subsidy.
The eibility to raise coverage to secure debt will singularly make
this progrcun universally acceptable and take pressures off many
other government agencies. The American farmer is not asking for
cheep coverage. They are first asking for the ability to cover
their cost of production and then for a reasonable premium. The
main problem of the current progreim is the amount of coverage not
the cost. ' '
The third recommendation is to redirect Federal Crop's '
actuarial approach to the program. The actuarial division must
be directed to stop the practice of subsidizing high loss ratio
areas with premium dollars from another part of the country. For
congress or private industry to evaluate any Federal Crop
Insurance progreun it must have accurate information. Once we
know the true probability of loss for a given crop in a given
area, then it is up to congress to decide the level of subsidy
and the farmer to decide if he wants to pay the premium. This
would stop nontraditional crops grown on marginal land. I have
been told that true rating in the norther corn belt would lower
corn premiums by 25%.
206
The new program division of Federal Crop actuarial should be
expanded. History has taught us that the private reinsurance
industry is not a consistent viable resource. I believe many
progreuns can be developed with government cooperation. It is not
necessary that the government subsidize these programs but simply
acts as a reinsurance source.
The demand for a quality disaster program administered
through the Federal Crop Insurance Corporation has wide spread
support in this area. I urge congress to either choose disaster
payments or Federal Crop Insurance to deliver aid to farmers.
The debate between the two forms of aid has gone much to long.
The American farmer needs steUoility and congress needs cost
control. I belive Federal Crop Insurance will favorably address
both concerns.
207
Farmers' Legal Action Group, Inc.
1301 Minnesota Building
46 East Fourth Street
Saint Paul, Minnesota 55101-1 109
(612)223-5400
(612) 223-5335 (fax)
April 5, 1994
Randi llyse Roth
INTERIM EXECUTIVE DIRECTOR
Lynn A Hayes
STAFF ATTORNEY
Juliet M Tomkins
STAFF ATTORNEY
Timothy J Sullivan
STAFF ATTORNEY
Admiitvd in Minnnot*.
Montana, and N«w Mei-co
Bruce M Kleven
STAFF ATTORNEY
Stephen Caipenter
STAFF ATTORNEY
The Honorable Tim Johnson, Chairman
Subcommittee on Environment, Credit,
and Rural Development
2438 Rayburn House Office Building
Washington, DC 20515
Dear Representative Johnson:
My name is Bruce Kleven and I am a staff attorney at Farmers'
Legal Action Group, Inc. (FLAG) located in St. Paul, Minnesota.
FLAG is a nonprofit law firm that provides legal services to
small and mid-size family farmers. FLAG is submitting testimony
today on behalf of its client National Family Farm Coalition
(NFFC) . NFFC represents 39 rural and farm advocacy organizations
in 30 states.
For the past eight years, FLAG attorneys have worked extensively
with USDA agencies, including the Farmers Home Administration
(FmHA) , the Agricultural Stabilization and Conservation Service
(ASCS) , and the Soil Conservation Service (SCS) . FLAG has
successfully represented thousands of farmers in class action
lawsuits to challenge illegal agency actions and to enforce
administrative requirements. FLAG also provides legal education
and training services to attorneys, farm advocates, and farm
organizations regarding USDA programs and related legal issues.
Over the years, FLAG attorneys have acquired specialized
knowledge in the field of agricultural law.
In response to the extensive flooding in the Midwest last stunner,
FLAG attorneys began analyzing existing disaster programs to cut
through the red tape surrounding federal disaster relief
assistance. FLAG published a book entitled Farmers' Guide to
Disaster Assistance that explains complicated disaster programs
in plain language format. FLAG also operates a hotline that
farmers from around the country can call for legal assistance.
Much of my work in the past year has focused on writing portions
of the book and answering calls from disaster-stricken farm
families. My comments this morning are directed at some of the
issues that were raised in the heat of the disaster last sununer "
and how they fit into the proposed crop insurance reform
legislation.
208
The Honorable Tim Johnson, Chairman
Page 2
April 5, 1994
General Comments
NFFC generally supports the concept of federal crop insurance
reform and welcomes a workable disaster assistance program. For
years, the federal crop insurance program has been plagued by low
participation rates and less than adequate coverage levels.
Although some farmers have purchased crop insurance as a normal
part of the cost of operating a farm, others have been forced to
give up crop insurance coverage because they could not afford the
high cost of insurance premiums. In either case, fanners with
disaster losses have relied on ASCS disaster payments because
crop insurance only covers a portion of actual losses. This dual
disaster assistance approach has caused considerable confusion
and has undermined the effectiveness of the crop insurance
program.
There are some innovative provisions in the proposed crop
insurance legislative reforms that address existing problems.
For example, FCIC has traditionally required a ten-year
production history to purchase effective insurance. A beginning
farmer who does not have ten years of history was penalized
because he could not be covered at an effective level until the
ten-year history was established. Section 508(f)(2)(A) of the
proposed legislation attempts to solve this problem by requiring
a minimum four-year history. Such a provision is a step in the
right direction to reforming the crop insurance system.
Specific Sections of the Bill
There are several provisions that NFFC feels must be addressed or
clarified.
1. The Catastrophic Coverage Level
Under the proposed legislation, the authority to pass ad hoc
disaster relief legislation has been replaced with a catastrophic
coverage level. Organizations that represent the interest of
family farmers, including NFFC, have debated the proposed
catastrophic coverage level. While the $50 per crop, per county
is arguably very affordable insurance, the proposed rate raises
some questions:
a) Does a farmer with 800 acres of corn pay the same $50 as a
farmer with 80 acres of corn? If the answer is yes, the
smaller the farmer, the more that farmer will pay for the
same coverage.
b) What happens when a farmer has more than two crops? The
language provides that catastrophic insurance can be
209
The Honorable Tim Johnson, Chairman
Page 3
April 5, 1994
purchased at $50 per crop, per county, not to exceed $100.
This allows only two crops to be covered, yet it is
unclear what happens when a farmer raises three or more
different crops. If the catastrophic coverage level is
capped at $100, there is no statutory mechanism that
allows a producer to insure crops three, four, and five at
a rate of $50 per crop.
c) Does the language "$50 per crop" mean per crop raised
(meaning all fields planted to that crop) or per field?
If the language is strictly construed, a producer with 20
corn fields would only have to pay $50 to insure all 20
fields, while the producer with 1 corn field pays the same
$50. The statute should define what "$50 per crop" means.
The above cjuestions illustrate some of the confusion that could
occur if the proposed legislation is adopted as drafted. FLAG
encourages the Committee to address these ambiguities to avoid
improper interpretation problems during the rule-making process.
2 . The Group Risk Plan
A new coverage option in the legislation is the Group Risk Plan
(GRP) , which operates on a county average system. Our
understanding of this option is that farmers can purchase GRP
coverage, and if the actual production for that crop is below the
county average, participating farmers will get a payment
representing that loss even if the farmer did not personally
suffer a loss. This will allow farmers who do not suffer a loss
to get a payment. The GRP is potentially inconsistent with the
purpose of the FCIC and the goal to improve the loss ratio.
On the other hand, if the overall county average is met during
the crop year, but an individual producer suffered a disaster
related production loss, a payment will not be made to that
producer because the county average was met that year. In this
situation, the producer purchased crop insurance, but could not
get an indemnity even though he suffered a substantial loss. The
GRP potentially covers unaffected fanners and does not always
cover affected fanners.
In addition, NFFC feels that a producer's actual production
history (APH) should be used in place of county averages if the
producer so chooses. The producer, not the insurer, should be
able to choose whether to use APH or county averages.
210
The Honorable Tim Johnson, Chairman
Page 4
April 5, 1994
3- The Delivery System
In past years, the FCIC has offered insurance through two
vehicles: directly through the FCIC or indirectly through
private insurance companies, which are reinsured by the FCIC.
The vast majority of the crop insurance policies (85 percent) are
purchased from private insurance companies. Regardless of
whether the policy was direct or reinsured, the producer would
get the same policy because the reinsurance agreement was
standard. In other words, private insurance companies had to
offer the same federal policy for a crop to all producers because
the agreements were standard. This system provided consistency
throughout the industry.
The new system appears to have the federal government offer
direct policies for the first 50 percent level of coverage (the
catastrophic coverage level) through ASCS offices. The private
companies would offer additional coverage levels above the
50 percent level. However, the legislation does not provide a
standard reinsurance agreement; in fact, private insurance
companies are encouraged to be more efficient and competitive.
In the absence of a standard reinsurance agreement, private
companies may draft insurance agreements that are either
arbitrary or unfair to the producers. In addition, producers
will lose administrative appeals rights because private insurance
companies will not be subject to federal administrative appeals
procedures. Without an effective appeals system, private
carriers cannot be held accountable for erroneous or unfair
decisions.
4. The Loss Ratio
The Budget Reconciliation Act of 1993 requires the FCIC to get
its loss ratio bac)c to 1.1 by October 1995. This means that the
Corporation cannot pay out more than $1.10 in claims for every $1
in premiums. Although the proposed legislation states this as a
broad goal, it does not explain exactly how the FCIC will comply
with the Budget Reconciliation Act.
A concern farmers have is that they will have to pay more and
receive less service because of the mandated loss ratio. There
are only two ways to maintain a loss ratio of 1.1: pay less in
indemnities or increase premiums. Either way, the producer will
get less service for the money.
Disaster Concerns
The flooding in the Midwest last summer forced some issues to the
table that had not been addressed in past years. This section of
211
The Honorable Tim Johnson, Chairman
Page 5
April 5, 1994
my comments illustrates problems that could recur in future years
and therefore need to be addressed.
1. Specific Cancellation Provisions
Producers who buy corn and soybean crop insurance in this part of
the country must purchase the policy by April 15 of the crop
year. However, the insurance premium is not due until October
when the crop has been harvested. This method of payment eases
the financial burden on the producer by reducing the amount of
money needed to finance the operation in the spring. Even though
the actual premium is not paid until the end of the year, a
binding contract has been created: The insurance company agrees
to provide coverage and the producer promises to pay the premium.
However, several farmers contacted our office in 1993 with
complaints about improper cancellation of insurance contracts.
In one case, a producer purchased crop insurance by April 15, and
the company agreed to provide coverage at a certain level. The
producer reported the planting dates, but did not provide the
exact number of acres. After the farm was flooded, the insurance
company notified this producer that they were cancelling his
policy, even though the contract had been formed.
In another case, a producer received disaster assistance in 1992,
and as a condition agreed to purchase crop insurance for the 1993
crop year. He did so by the April 15 deadline, and reported the
number of acres to ASCS but did not report his acreage to his
private insurance carrier. He believed that this was adequate,
since both ASCS and FCIC are government agencies. Again, after
the farm had flooded, the insurance company notified him that it
was cancelling his policy because he failed to report his
acreage. When ASCS learned that the producer was out of
compliance because he did not have crop insurance in effect for
1993, it notified him that he was ineligible for 1993 disaster
payments and that he must pay back 1992 disaster benefits. This
producer ended up without insurance coverage for 1993 and in
addition, had to pay back 1992 benefits.
The regulations governing the crop insurance program (located in
volume seven of the Code of Federal Regulations at Part 400)
provide specific reasons for cancellation of an insurance policy.
Valid reasons for policy cancellation include failure to pay the
premium, fraud, misrepresentation, death, and judicially declared
incompetency. However, failure to provide planted acreage and
planting dates are not valid reasons for cancelling the policies.
Despite this language, insurance companies denied coverage for
those reasons in the examples.
212
The Honorable Tim Johnson, Chairman
Page 6
April 5, 1994
Unfortunately, in a year when the producers needed the insurance
most, the insurance companies were all to eager to avoid claims
whenever they could. Clear and fair cancellation provisions
should be included in this legislation so that insurance
providers will be prevented from acting arbitrarily with respect
to the cancelation of policies.
2. Penalties for Dual Coverage
Another unfair and costly situation that occurred this summer
concerned the issue of dual coverage. A Minnesota farmer had
inadvertently purchased two crop insurance policies on the same
acreage for several years. One policy was purchased directly
from the FCIC and one was purchased from a private carrier. The
regulations specifically state that only one policy can be in
effect at one time. However the farmer honestly believed that
the two policies were different.
The dual coverage existed for several years but was discovered
this past svimmer during the severe flooding. As a penalty, the
FCIC required this person to pay back all of the indemnities paid
out on one of the policies. Fortunately, the FCIC required him
to pay back the lower of the two indemnities. However, the
payback requirement still increased the financial burden in a
year when he could least afford the penalty.
It is interesting to note that the severe payback penalty is not
a statutory provision. The payback requirement was adopted
through the agency's rule-making process in 1987, even though
there was no statutory authority for this penalty and the
explanation of this rule did not disclose the origin of the
penalty. It seems that this harsh penalty appeared from nowhere
and was used to increase the financial burden on one disaster-
stricken producer. This legislation should include specific
language that does not allow the FCIC to have the dual coverage
payback penalty.
3 . Livestock Feed Assistance
Past disaster bills have focused significantly on providing
compensation to producers of cash grain crops who suffer disaster
losses. One group of agricultural producers who are consistently
left out of federal relief dollars are livestock pi^oducers. The
current emergency livestock feed assistance program allows
livestock producers feed assistance only after the entire county
where the producer resides has lost 4 0 percent of its available
feed supply. This threshold is very hard to meet, and therefore
the program is not available very often, and when it is, the
requirements are complicated and the relief is not effective.
213
The Honorable Tim Johnson, Chairman
Page 7
April 5, 1994
The proposed crop insurance legislation continues to exclude
livestock producers by addressing only cash-crop insurance.
Although livestock producers can purchase insurance for feed
grains, insurance is generally unavailable for forage and hay
losses. While cash crop producers will be able to protect
themselves from future disaster losses under this legislation,
livestock producers cannot purchase similar protection for their
commodities.
This is important because the current emergency livestock feed
assistance program is funded through annual disaster
appropriations. If this legislation is adopted, the authority to
pass future disaster bills is repealed. Unless language is
included that will protect the interests of livestock producers,
the emergency livestock feed program could not be funded because
the authority to do so would be repealed.
4. The Emergency Conservation Program
Another disaster program that is available only during natural
disasters is the Emergency Conservation Program (ECP) . The ECP
provides cost share assistance to producers to help restore
conservation structures that were damaged as a result of a
natural disaster. The ECP is only available through a
Congressional appropriation. If the federal crop insurance
reform legislation repeals the authority to pass future disaster
bills, this useful program might not be funded to assist
producers who lost valuable conservation structures.
We thank this Committee for holding these field hearings and
maintaining its commitment to improving the federal crop
insurance program.
Respectfully submitted,
FARMERS' LEGAL ACTION GROUP, INC.
p2t
Bruce M. Kleven
Attorney at Law
BMK/tr
214
UVGITIG Mayor William V. Weber
11 eSE Park Street
Luveme. MN 56156-1730
APR n * 189* Home 507/2B3-2444
Oflioe 507/283-2388
Fax 507/283-4869
April 1, 1994
The Honorable Congressman Tim Johnson
515 South Dakota Ave.
Sioux Falls, South Dakota 57102
Dear Honorable Tim Johnson:
I appreciate your efforts to understand the situation of our
area farmers following last year's flooding and the efforts
of your subcommittee in its work on federal crop insurance
reform.
I would like to formally welcome you and members of your
delegation to Luveme, and thank you for selecting Luveme
as a location of the Subcommittee on Environment, Credit and
Rural Development field hearing on federal crop insurance
reform to be held on April 5th.
I am sure the subcommittee will have a good opportunity to
hear from area farmers as they offer input on how the
program can be restructured to better accommodate their
needs .
Once again, thank you for your concern and support.
WILLIAM V. WEBER
MAYOR
WVW:rf
Th«Cil|fclLuv<n«l»inA«nn1i>»Ac<anE9Ui<0|i|i«imitt|rEmplO)ti
215
Comments and Suggestions on
Crop Insurance Refonn
from Greg Wheelock,
Crop Insurance Services
P.O. Box 3123
Mankato, MN 56002-3123
507-388-5367 • Fax 507-388-3431
1. While prevented planting coverage has been added, a 3 day reporting requirement is
too stringent. The last thing on farmers' minds will be reporting in every 3 days.
2. Complexity and time requirements of MPCI are too excessive for many agents. If
these agents are expected to exert their energies and abilities in promoting MPCI to
meet the target of insuring 80% of potential acres, their commissions cannot be cut
year after year.
a) For example, for 1994 most agents w^ill receive 1.5% of base premium less
because most companies pass the entire expense reimbursement reduction by
FCIC to their agents. Thus, if the average agent received 15% of base premium in
1993, then a 1.5% of base premium reduction in said commissions equates to a
10% reduction in income.
It won't take long for agents to realize they can make more money selling lines
other tiian MPCI if their commissions are reduced further, and thus your 80%
participation target won't be realized.
b) $50 - $100 per farmer for the 50/60 catasbrophic policy is an unreasonable
amount of compensation for agents and companies to process the same amoimt
of paperwork and pay for added expenses (additiorul computer programming
requirements; additiorul training of company vmderwriters, field staff and
agents; and extra auditing requirements).
Also as $50-$100 provides no incentive for an independent agent to complete said
paperwork, then the "job" reverts to ASCS to process the policy. I doubt if an
ASCS employee has any incentive to provide more than basic or minimum
service to an insured. Thus, as no one has incentive to work with an insured to
obtain optionzd units with coverage based on actual production history, the
insured will become disastisfied, the negative attitudes toward 'Tederal Crop"
wil continue, and your 80% participation goal won't be reached.
c) Remove the proposal 508 (b) (4) to waive the $50 - $100 "premium" for limited
resource farmers. As harsh as this may sound, if a farmer can't afford $100 for
this coverage, chances are he/she shouldn't be farming anyway.
3. Added land rules need to be relaxed /revised to accoimt for land added in the last
three years. It is disheartening that land added in 1991, 1992 or 1993 may have
216
T yields of 65% to 90%, yet if the same land is added in 1994, it most likely would
receive a 100% T yield. Consideration should be given to "grandfather" in land
recently acquired by (existing) insureds.
4. Suggest the 50/60 catastrophic coverage be based on a program similar to GRP as
this is meant to replace the disaster programs which are administered on a county-
wide basis. While the coverage is essentially free, it should be shown that said
coverage is meant only to replace disaster assistance and that "buying up" to
additional coverage is a cost effective risk management tool. This may create an
incentive for both the insured and agent to work together in a long-lasting
relationship.
5. Mcmy of the new applicants for 1994 (because of disaster requirements) state they
have not Ccuried MPCi coverage or have dropped MPCI coverage because 65%
doesn't cover enough, 75% is too expensive, and com coverage is too expensive,
espedeilly in relation to soybearis. While I may not have the answers to these
problems, the farmers' voices in these matters must at least be heard before they can
be addressed. In short, higher coverage options need to be more affordable.
6. To insure that claims are paid as timely as possible, suggest guidelines be set for
companies as to:
a) The ratio of adjusters to policies
b) Whether claims must be "verified" after adjustment and if so recommend the
ratio of verifiers/ auditors to policies.
c) Exact loss adjustment procedures defined before losses set in (too much
interpretation in 1993 concerning wet com and drying changes).
d) Recourse for the insured when claim is not paid within 30 days as stated in
policy provisions.
7. While most agents educate others as much as possible about MPCI, their resources
are limited. Much of the negative attitude towards MPCI is due to ignorance. Many
of the people that farmers turn to for advice, such as barJcers, accountants,
commodity brokers, ASCS and Extension employees, financial advisors, and the like,
do not fully understand MPCI and what it can or cjinnot do as a risk management
tool A large scale training program must be offered to these professior\als so they
can at least extend "educated advice" about MPQ.
8. Remove proposal 508 (d) (3) to allow companies to pass on any savings in expense
reimbursement to the producer by reducing premiums. The proposal h<is several
inherent problems.
a) Economies of scale normally dictate that the largest companies have the
lowest costs «md covdd pass more savings on to the insured than smaller
companies thus creating vmfair competition. The big get bigger and the small
get smaller.
217
b) Smaller companies, in order to compete with larger more efficient companies
may begin "cutting corners" on adjustment, audits and underwriting in an
effort to cut expenses. Premium is reduced, but so is service and quality.
c) In the Midwest, most coverage is at 65% and is reasonably priced. Does this
level really need to be subsidized by more efficient companies? I don't think
so. Let the rates come down by themselves through greater participation
(80% target) and broader diversification of risk.
d) In the long run, by showing that a company is well run and efficient, its
expense reimbursement ft-om FCIC will likely drop. If OMB sees a company
can afford to pass on savings to the farmer, they wiU think the expense
reimbursement is too high and thus lower it. Net result: income drops and
premiums rise. There is no longer any savings to pass on to farmers uitless
the company again lowers commission to agent.
9. Agents and comparues need recourse through other goverriment agencies such as
ASCS and FmHA for collection of unpaid MPCl premiim^. It makes no sense that
farmers can continue to collect other USDA benefits when their subsidized MPCI
premium remains unpaid. There is a need to offset unpaid MPCI premiums from
other govenunent assistance programs such as deficiency payments at ASCS.
10. Rather than creating an additional MPQ program with the 50/60 catasfa-ophic
coverage, improve what we've got now and just stop creating ad hoc disaster
programs! When farmers and their bankers realize the government is not going to
keep "bailing tiiem out" they'U resort to tiie self-help risk management program we
now have with MPQ.
11. If disaster programs continue, make MPQ a requirement regardless of the amount
collected from disaster payments and require that MPQ be carried for more than
just or\e year.
REVIEW OF THE ADMINISTRATION'S FED-
ERAL CROP INSURANCE REFORM PRO-
POSAL
THURSDAY APRIL 21, 1994
House of Representatives,
Subcommittee on Environment, Credit,
AND Rural Development,
Committee on Agriculture,
Washington, DC.
The subcommittee met, pursuant to notice, at 10:30 a.m., in room
1300, Longworth House Office Building, Hon. Tim Johnson (chair-
man of the subcommittee) presiding.
Present: Representatives Long, Minge, Pomeroy, Thurman,
SarpaUus, HilUard, Baesler, Combest, Allard, Ewing, and Dickey.
Staff present: Joseph Muldoon, associate counsel; Gary R. Mitch-
ell, minority staff director; Jan Rovecamp, clerk; Anne Simmons,
Dwight Fettig, Merv Yetley, and David Ebersole.
OPENING STATEMENT OF HON. TIM JOHNSON, A REPRESENT-
ATIVE IN CONGRESS FROM THE STATE OF SOUTH DAKOTA
Mr Johnson. We will bring the Environment, Credit, and Rural
Development Subcommittee to order. I apologize for running a few
minutes late. I was testifying in the Raybum Building, and that
caused some complications. j • • a. 4- '
The purpose of today's hearing is to review the administration s
crop insurance reform proposal. We have heard from Gene Moos
and Ken Ackerman in our initial hearing, and we also heard trom
producers, crop insurance agents, and lenders during a field hear-
ing held in the gentleman from Minnesota, Mr. Mmge s district.
As you are all aware, our Government is involved in a dual sys-
tem—one of crop insurance, the other of ad hoc crop disaster pay-
ments. Frankly, neither of them work as well as they ought to.
One goal of the 1980 overhaul of the crop insurance program was
to eliminate the need for ad hoc disaster programs. Clearly, this
has not occurred. Congress has authorized ad hoc disaster pro-
grams every year since 1986. rr u-n-
The Federal Government has spent an average of $1.7 billion an-
nually for crop insurance and ad hoc disaster payments during the
past 10 years. Producers are disenchanted with the crop insurance
program, as evidenced by the fact that participation is limited.
Only 30 percent of the eligible acreage is enrolled. And when they
do experience crop losses, coverage is often perceived to be inad-
equate.
(219)
81-128 0-94
220
Ad hoc disaster programs are unpredictable in that they require
emergency appropriations which, in turn, generally require large
regional disasters that are subject to the political whims of the mo-
nient. Producers cannot budget for it, and it makes financial plan-
ning for them and for lending institutions virtually impossible.
We have the two programs purportedly working side by side to
help producers, but in many respects they are working at cross
purposes. The very existence of ad hoc disaster programs under-
mines producer willingness to invest in crop insurance and, in fact,
many producers all too often do not take out crop insurance be-
cause they believe that the Federal Government will bail them out
by offering free ad hoc disaster payments.
I commend this administration for taking a comprehensive ap-
proach to reform, offering one program that combines catastrophic
and higher-level insurance coverage for all currently insurable
crops, with standing disaster for noninsurable crops, and solves the
many problems that have been enumerated here.
This subcommittee must now examine the details of the adminis-
tration's bill. Above all, any crop insurance proposal must be fis-
cally and actuarially sound and within our budget requirements.
Producers must be convinced of two things: One, that their out-of-
pocket costs for insurance must be commensurate with potential in-
demnities they may earn; second, ad hoc disaster programs are, in-
deed, a thing of the past.
It is essential that Congress goes beyond merely restating its op-
position to ad hoc disaster programs if this reform is going to work.
Part and parcel of any effective reform will have to include changes
in budget rules that will make ad hoc disaster payments exceed-
ingly difficult to come by.
There are many other concerns that have been expressed to me
about the administration's proposal, and they can be discussed
later in this hearing.
We are all anxiously awaiting action by the conferees on the fis-
cal year 1995 budget resolution to determine how much money we
will have to work with in implementing the reform proposal.
Mr. Combest and I have been in touch with the conferees, as
have OMB Director Panetta, Chairman de la Garza, Mr. Roberts,
and a number of other Members who want to see this improvement
happen. Pending the outcome of the conference and floor action, I
plan on being as aggressive as possible in moving H.R. 4217
through this subcommittee. I will continue to work with Chairman
de la Garza and other members of the committee as this legislation
moves to full committee. I'd like to welcome today's witnesses. I
look forward to their testimony.
A lot, again, does depend on the outcome of the budget negotia-
tions. If the budget numbers come out too short, this reform simply
will not be a viable option. But I think at this point we need to
continue to proceed on the assumption that we will have the fiscal
resources necessary to make this a real alternative and a real re-
form.
Now, I recognize my colleague, Mr. Combest, for any opening
statement he might choose to make.
221
OPENING STATEMENT OF HON. LARRY COMBEST, A
REPRESENTATIVE IN CONGRESS FROM THE STATE OF TEXAS
Mr. COMBEST. Mr. Chairman, thank you.
I would like to join you as per your statement on an aggressive
consideration of this legislation as it moves forward — something
that is well overdue.
Mr. Chairman, it looks as if you have put together a great group
of witnesses with great expertise in Federal multiperil crop insur-
ance and how it affects agricultural producers around the country.
I am especially interested in getting the perspective from agricul-
tural lenders as well as local professional insurance agents.
About 3 weeks ago, during the Easter recess, Mr. Chairman, I
held a town meeting in Lubbock, Texas, that was attended by
about 200 farmers and insurance industry representatives. They
came together to hear Ken Ackerman, the Manager of the Federal
Crop Insurance Corporation, explain Secretary Espy's proposal.
Knowing that crop insurance is a useful tool for farmers in west
Texas, I was encouraged by the number of farmers who attended.
I believe most of them went away from that meeting with a gen-
erally positive outlook about the possibilities and benefits of this
program.
Although there will be adjustments made before we send the bill
to the President — one of which obviously is to get enough money
to properly fund it — I believe the program changes offered so far
are greatly workable. Even faced with the necessity of adding $1
billion on budget to fund this proposal, it is sound fiscal policy.
The fact is: Wherever bad weather affects a critical mass of
Members' districts, we have been reaching out and declaring an
emergency and grabbing an extra billion or so every year for disas-
ter assistance. That cannot continue
I look forward to the testimony of all the various groups today.
There will be mginy particular concerns which I believe can ade-
quately be addressed so that this may be a truly comprehensive re-
form effort.
Mr. Chairman, I would also ask unanimous consent to put in two
very short statements that were given to me at the Lubbock meet-
ing that I had mentioned — one from the Plains Cotton Growers and
one from the Texas Wheat Producers Association.
Mr. Johnson. Without objection.
Mr. COMBEST. Thank you, Mr. Chairman.
[The prepared statements of the Plains Cotton Growers and
Texas Wheat Producers appear at the conclusion of the hearing.]
Mr. Johnson. We are anticipating a journal vote at about 11
today, so opening statements — we can keep them reasonably brief,
but nonetheless I appreciate that people may have some opening
remarks they choose to make.
Ms. Long.
Ms. Long. No.
Mr. Johnson. Mr. Allard.
222
OPENING STATEMENT OF HON. WAYNE ALLARD, A REP-
RESENTATIVE IN CONGRESS FROM THE STATE OF COLO-
RADO
Mr. Allard. Mr. Chairman, I'd just like to associate myself with
both your comments and those made by the ranking republican of
this subcommittee.
As a member of the Budget Committee, I would like to see some
predictability in the budgeting process. I think that is what we are
striving for here in this committee — to have some predictability not
only in the Federal budget, but also in insurers, when they are
looking at their budgets, as well as agricultural producers and
other financial institutions that may be making loans to agricul-
tural interests.
So I am interested and glad to see that we are moving along on
this particular issue, because I think it is important, if we are
going to have responsible budgeting at the Federal level and so our
agricultural growers can have some expectations of what is ex-
pected of them if they find themselves in a disaster, and it is based
upon more or less what they perceive would be their needs as far
as insurance coverage is concerned.
Thank you.
Mr. Johnson. Thank you.
I have a couple of letters to submit for the record.
[The letter from Mr. Panetta and the letter from the American
Agriculture Movement, et cetera, appear at the conclusion of the
hearing.]
Mr. Johnson. Mr. Sarpalius.
OPENING STATEMENT OF HON. BILL SARPALIUS, A
REPRESENTATIVE IN CONGRESS FROM THE STATE OF TEXAS
Mr. Sarpalius. Thank you, Mr. Chairman. I, too, want to com-
mend you for the witnesses you have today. I am especially anxious
to hear the comments from the lending institutions that are here —
different banks — to see if they feel this plan is satisfactory to cover
the loans that they make to producers, and also to get their opin-
ions on whether or not they think producers should have additional
coverage. I'm anxious to find out how much that additional cov-
erage would cost, and also if the appraisals that are made when
losses occur — and, in their opinion, if they feel like they feel those
appraisals are satisfactory to cover their losses.
Thank you, Mr. Chairman.
Mr. Johnson. We are going to be having a journal vote some
time around 11, and I anticipate numerous other votes during the
course of the day, which will necessarily cause some disruption, but
I would caution the members of the subcommittee that I want to
keep the time spent on votes to an absolute minimum. We will
recommence the hearing very quickly after voting on each instance,
so do come back as quickly as we can because we are not going to
allow the disruptions to cause more problem than they already will.
Also, I have a prepared statement from Mr. Pomeroy for the
record.
[The prepared statement of Mr. Pomeroy follows:]
223
Opening Statement
Congressman Earl Pomeroy
Subcommittee on Environment, Credit, and Rural Development
April 21, 1994
Mr. Chairman, I look forward to today's hearing to learn
more about the reaction of the key players in this debate --
commodity groups, farm organizations, bankers, and providers of
insurance --to the Administration's proposal to reform the crop
insurance system.
This issue is of enormous importance to my state.
• North Dakota ranks first in participation in the nation --
measured by base acres enrolled -- for most commodities
grown in the state.
• North Dakota producers have positive and productive
relationships with insurance agents.
The result of the private-public sector partnership is a
crop insurance product that is attractive to producers and
works well for them.
Nevertheless, the product could be improved, the
participation rate could be higher, the coverage could be a
better buy for the value -- and all of these MUST be achieved by
Congress if we are to ask producers to give up access to ad hoc
disaster assistance.
Mr. Chairman, you all know that I supported changing the
budget rules to shift the baseline to combine ad hoc and
mandatory spending. I firmly believe that the House Budget
Committee did the right thing --in terms of accountability to
taxpayers, of strengthening the system for producers, and of
trying to move toward a system where each producer has more
control over his or her individual risk.
However, I also believe the House Budget Committee did not
go far enough. Yesterday, I sent a letter to the budget
conferees signed by 15 members of the Agriculture Committee on
both sides of the aisle who want to see crop insurance receive
full funding. Without knowing whether the proposal will have
full or partial funding, I fear that our discussions today are a
bit speculative. Nonetheless, many of the issues we will discuss
today are part and parcel of the existing system and should be
addressed whether this committee considers legislation this year
or next. I look forward to the testimony today.
224
Mr. Johnson. Welcome, Mr. Odom. Your full statement is re-
ceived for the record. You may choose to summarize or however you
choose to go about it.
Because we have a very long list of witnesses today, we will
abide by the 5-minute rule — ^the green light, and then to the yellow
and red. I won't gavel anybody down, but when you do see the red
light come on, be thinking of winding up your remarks.
Why don't you proceed.
STATEMENT OF BOB ODOM, COMMISSIONER, LOUISIANA DE-
PARTMENT OF AGRICULTURE AND FORESTRY, AND PRESI-
DENT, NATIONAL ASSOCIATION OF STATE DEPARTMENTS
OF AGRICULTURE
Mr. Odom. Thank you, Mr. Chairman.
I am Bob Odom, commissioner of the Louisiana State Depart-
ment of Agriculture and also president of the National Association
of State Departments of Agriculture. I appreciate the opportunity
of coming before you this morning on what I think is a very, very
important subject.
At the same meeting in Texas with Ken — he left Texas and went
to Louisiana and spent 2 days there meeting with farmers in about
four different areas throughout our State. I thought the discussions
were very good. The interest is there, and it is obvious that we
need a change.
The disaster program and the insurance program both working
side by side are not what our farmers need in order to provide the
security that we need in order to make the loans in order to stay
in business.
One of the problems that I would mention is in our State and in
some of the other States. From investigations in court actions, we
have had misuse of crop insurance. We have had some people in
some States that have farmed for crop insurance. That is not good
for the mainstream farmer, nor is it good for agriculture, in gen-
eral.
Many farmers throughout this country need a crop insursmce
program designed for the mainstream, low-risk, commercial farmer
who is interested in financial protection in case of a loss due to
drought, floods, or natural disasters, and we need a program that
farmers can afford.
The proposed Federal Crop Insurance Reform Act of 1994 pro-
vides the framework to meet this need, and also provides the posi-
tive change needed if the Federal crop insurance program is to sur-
vive.
Additionally, the proposal eliminates the uncertainty of farmers
receiving assistance from ad hoc disaster programs by providing
catastrophic risk protection that is part of the crop insurance pro-
gram.
Providing disaster assistance on an ad hoc basis as we do today
tends to discourage participation in the crop insurance program.
The possibility that a farmer will receive some type of assistance
even if he does nothing to protect himself from a loss sends a very
strong signal that crop insurance is an unnecessary expense. It is
widely accepted that we cannot continue to have both programs be-
225
cause of the cost and because of the inequities in the assistance to
provide poor and current disaster programs.
Farmers prefer a comprehensive crop insurance program that
will help meet the financial security needs on an individual basis
rather than the uncertainty of an ad hoc disaster program depend-
ent upon wide area, multistate disaster and congressional approval
of funds.
I support this part of the proposal which provides a permanent
base level of support at a nominal cost to the farmers, yet costs no
more than has been average cost to the taxpayer over the last 10
years or so in both disaster and insurance programs.
Specifically as it relates to the proposal, I support the following
concepts that have been included:
One, a comprehensive Federal crop insurance program must
meet the needs of mainstream, low-risk producers by offering them
financial security in cases of drought, flood, natural disasters, and
must have incentives to attract those producers to the program to
insure a wide-spread participation.
For example, premium discounts should be offered to those farm-
ers with good experience. Consequently, farmers who consistently
have losses should be placed in high-risk pools and taken out of the
actuary database to calculate the premium.
Additionally, significant premium discounts for high level of cov-
erage are critical in order to attract participation at those high lev-
els of coverage which are needed to make the program more fiscally
sound. It is my understanding that these incentives will be in-
cluded in this program.
Insurance coverage should be on the actual production history of
an individual farmer on proven 3delds — proven through the farm
service center when the reorganization structure is completed rath-
er than to insurance companies through private agencies. This will
reduce any attempt to assign production history to a farm on the
production that does not occur.
Again, it is very important that we put it on an individual prov-
en yield and not on some parish or some county basis that tends
to lead to farmers farming for crop insurance rather than for their
own production.
Farmers should have the option of buying the level of coverage
they determine best meets their needs on an individual basis.
Under the proposal, farmers may purchase additional insurance
coverage providing high yields or price protection levels above the
basic catastrophic risk protection for additional premiums.
The FCIC has stated that farmers will have more flexibility on
jrields and price and unit structure than is currently available, with
the assurance that this program will be more farmer-friendly, with
new products and new flexibility. Incentives are provided through
premium discounts at high levels to encourage greater participa-
tion, which I feel is extremely important to the success of the pro-
gram.
Premiums for the buy-up coverage must be reasonable and af-
fordable for the risk involved in order to enlist the low-risk farmers
into the program. Farmer records should be identified by farm se-
rial number and Social Security number. And ad hoc disaster as-
226
sistance for all crops eligible for crop insurance should be elimi-
nated.
I support the catastrophic risk protection program offered in the
proposal at a 50 percent loss in yield indemnified at 60 percent of
the expected market price. I do not feel that a lower base level cov-
erage will meet the needs of farmers who choose not to purchase
buy-out levels of coverage.
A base level of coverage that is too low will not provide the farm-
ers with significant financial coverage to see him through a crop
loss, and will only encourage calls for an ad hoc disaster assistance
to make up the difference. This will find ourselves right back where
we are today.
I also support the noninsurance assistance program that covers
those crops for which crop insurance coverage is not offered today.
Replacing the ad hoc disaster program with uncertainties and the
catastrophic risk protection program for a noninsurance assistance
program which contains a protection is critical to this proposal.
With both programs offered, available to the fanners who
produce crops eligible for crop insurzince, Federal crop insurance
and ad hoc disaster, a conflict exists which creates uncertainty and
provides a disincentive for low-risk producers to participate in a
crop insurance program, thereby weakening the whole program.
The lack of participation creates a high loss ration to premium
earned creating the need to increase rates, which further aggra-
vates the participation problem. Combining these two programs
into one eliminates uncertainty and meets the needs of farmer par-
ticipation in their financial planning and banking relationship.
Mr. Chairman, thank you for the opportunity to participate in
this very important heziring today and allowing me to express
NASDA's support for the administration proposal, Federal Crop In-
surance Reform Act of 1994.
The current program is not serving the needs of mainstream
commercial farmers, and a total reformation of this program is
needed.
Thank you.
[The prepared statement of Mr. Odom appears at the conclusion
of the hearing.]
Mr. Johnson. Thank you, Commissioner Odom, for your views
and the views of NASDA. I particularly appreciate your emphasis
on the concern for actuarial soundness and the emphasis in the
program.
Let me ask you: In 1980, Congress reformed crop insurance and
said "never again" to ad hoc crop disaster pajmients. We know
what happened after that.
This time we are saying we really mean it, we are going to
change the budget rules so that future ad hoc programs would have
to be funded either by higher taxes or by cuts in other spending.
How much credibility does that have out in the countryside in
Louisiana? Do farmers really — are they going to believe us when
we say this time there is not going to be an ad hoc disaster pay-
ment so you'd better sign up for crop insurance?
Mr. Odom. I believe that if we see the disaster provision put into
the bill as we see it here today and we require — and I know that
requiring is, in a lot of terms of farmers, is a nasty term, but I do
227
feel that for the price that they are saying — $50, no more than
$100 — that it ought to be mandatory in the program.
Under that scenario, and for it to be successful, we've got to
make sure that program develops an opportunity for that farmer —
that mainstream farmer who wishes to buy up 75 or 85 percent
coverage — to have that opportunity at a reasonable premium.
The reason that ratio has been so great is we have not had in
the program, in my State and a lot of the other States, that farmer
that has always been in the top of the production that would make
the program fiscally sound. We have had too many people in the
program to farm for crop insurance.
As long as we have that, we will not have a program. That's why
it is important, again, to have it by Social Security number, have
it on individual yield. If you put it on individual yield and you con-
tinue to have a bad year, you are not dependent on that average,
you're dependent on your 5deld. It has got to be proven.
We have proven yields for years at ASCS offices, and it has not —
it ought to be on a proven record. I think that would put the fiscal
soundness in the program, that farmers will see that it is sound.
And yes, I believe that we will see that it is real. And yes, I believe
that they will participate in the program.
Mr. Johnson. Mr. Combest.
Mr. Combest. Mr. Chairman, I have no questions.
Mr. Johnson. Ms. Long.
Ms. Long. I don't have any questions either.
Mr. Johnson. Mr. Sarpalius.
Mr. Sarpalius. Mr. Commissioner, you have indicated in your
statement and just a while ago your concerns basically of farmers
who would probably farm the program, or abuse the program,
which does occur.
In your opinion, do you think if we provide this insurance pro-
gram for more producers — do you think the bill is strong enough,
or this legislation that we are looking at, or program we are look-
ing at, is strong enough to discourage farmers from farming the
program?
Mr. Odom. I don't think you'll ever stop all the thieves. I think
that we've got to do some other things to make sure that happens.
I would like to see a mechanism. I support a mechanism that a lot
of people may not support, but I think we need to involve county
agents in this thing. I think somebody needs to go and make sure
that all the farmers that are signing up are carrying on normal
farming activities.
If we put it on an individual farmer's yield, if that yield contin-
ues to go down that coverage has got to go down, and it depends
upon what that production is.
I think that will help solve that problem.
Yes, I think we'll always have somebody misuse any program,
but I think we'll get the majority of the farmers that will not. And
I think today that we've got the majority of the farmers participat-
ing. Unfortunately, those that are farming for the program are the
ones that get newsworthy.
I think the adjusting of the claims is as important as the cov-
erage, and I think that we've got to work some things out in the
adjusting of the claims to make sure that whoever adjusts the
228
claims — ^whether it is a county agent, whether it is somebody else
doing it — ^that a normal farming activity is carried on.
I happen to be elected as commissioner of agriculture. One of the
things that I happened to have done before — -I was in a consulting
business. I did a lot of crop damage evaluation work for most of the
major insurance companies on pesticide damage. One of the things
that had to be is that you had to prove what that production would
have been on that farm under normal circumstances when that loss
was there and not on some other type of average or basis, and
that's what we've got to do in the crop insurance program.
Mr. Sarpalius. Thank you.
Mr. Johnson. Mr. Allard.
Mr. Allard. No questions, Mr. Chairman. Thank you.
Mr. Johnson. Mr. Minge.
Mr. Minge. Thank you. I have a couple of questions.
I appreciate your being here on behalf of not only Louisiana, but
other States.
I have reviewed the statistics over the last decade for the pay-
outs under Federal crop insurance compared to the income that has
come in from different sections of the country, some county-by-
county, and we have some dramatic regional disparities, and even
disparities within States.
There is a fear that if the Federal Government does not subsidize
Federal crop insurance to a very heavy extent, that certain crops
in certain areas — and I think that perhaps your part of the country
is favored somewhat more than the upper Midwest where I come
from in this regard — it would be very, very difficult to finance crop
insurance with premiums in the South and the Southeast.
Do you have any observations on that?
Mr. Odom. The mainstream farmer in the South and Southeast
does not participate in crop insurance program, and I think that's
the reason you see the difference in the loss ratio.
We have to have a program that gets those involved. I would say
in sugar production you have probably got less than 5 percent. In
cotton, I would say — and I haven't seen these figures — ^you've prob-
ably got less than 15 percent. I'm talking about Louisiana specifi-
cally now.
A^ain, the problem that is there is that when we put it on a par-
ish average, most of those farmers in a disaster year have to make
better than the parish average to stay in business. That's why the
program, the way it has been designed, has tended to give an in-
centive to farm for crop insurance rather than farm for the produc-
tion, and we've got to take that out of it. If we don't take that out
of it, I don't care what we do — ^we still won't have a program that
is fiscally sound.
Farmers in my State and farmers throughout this country have
got to have a program that bankers are satisfied with in order to
be able to have the loans in order to be able to stay in production
agriculture. That's why I came back and said a few minutes ago
I think this proposal is in the right direction.
I think we've got to look at the adjusting side of it, as well, and
make sure it follows, and I think that can be done administra-
tively, but it has got to follow along with it.
229
If we jfind somebody misusing the program, he needs to be
brought to task and brought to task severely because that affects
all of the farmers.
Mr. MiNGE. Do you think that farmers in the South and South-
east will participate in the program rather than rebel and say we
can't afford crop insurance because the premiums would be too
high given the frequency of a hurricane system coming through,
which is so devastating compared to the less common threat of that
type of an occurrence in some of the other parts of the country?
Mr. Odom. Yes. But I think one other thing — I think when we
look at the premiums, if we looked at the premiums today he can't
afford — the mainstream farmer can't afford it because the risk ratio
is not there. We are going to end up having to look at a premium
incentive for that 85 percent carrier. In most of the cases, that 85
percent carrier is going to be a less risk of loss than somebody
down into a lower range, because if you look at his production
record — and we are going to have to look at that. We are going to
have to look at what his record has been, and then we know actu-
arially how sound that insurance for that individual farmer would
be.
But yes, I think that if we got a premium that was reasonable
to get him involved — and one of the things I see this does with ev-
erybody participating is it builds that database that we've got to
have.
Mr. MiNGE. Let me ask another question before my time expires.
I am also very concerned that the Federal Government is having
trouble financing the Federal crop insurance subsidy. The Senate
has balked at this.
I know in Minnesota we have a $600 million budget surplus, and
they are trying to figure out what to do with it — have a tax holi-
day, or what are they going to do up there? That's a happy prob-
lem.
The question I am going to pose to my Grovemor and State legis-
lature is: Is the State of Minnesota prepared to participate or join
hands with the Federal Government in Federal crop insurance or
some other program which is important to our State? I would ask
you, as a representative of the State of Louisiana or other State ag-
ricultural commissioners, if you think that a State-Federal partner-
ship is in the cards at all with respect to this problem if we have
trouble trying to come up with the money that all of us recognize
we have to have for a good crop insurance program?
Mr. Odom. In my State I am looking at $1 million below last
year's spending, 51 positions below last year's position level. It
would be awful tough to come with a new program.
As you know, we have a sajdng in Louisiana, "We've been so rich,
so happy, so fat, so dumb, and all so long it has been hard for us
to make other changes." Now we are trying to do that. I think it
would awfully tough at this time to make that change.
I believe that if we can put the expenditures that we have spent
in the disaster programs and in the crop insurance that we can
make it fiscally sound, and I would have to say that under the con-
ditions that I see other States in — and I know that some of the
other States are in the same shape that we are in — it would be a
better way to go. That would be a tough issue for all the States.
230
Mr. MiNGE. Thank you.
Mr. Johnson. Mr. Ewing.
Mr. EwiNG. Thank you, Mr. Chairman.
Commissioner, I represent central Illinois. I'm not thinking about
buying extra insurance, but I am thinking about the disaster provi-
sions of this proposal, the 50 percent proposal. Many times, even
when we have a very bad year, the crop 5deld doesn't fall below 50
percent.
What would you think in your State of allowing for some options
where maybe they would have, instead of the 50 percent production
with the 60 percent payout, have a 60 percent loss with only a 40
percent payout? Do you think more producers would find that at-
tractive?
Mr. Odom. I'd have to look at the economics of that. Until I sat
down and looked at how the 60 percent and 40 percent economi-
cally worked out, I really don't know.
Mr. EwiNG. You mentioned options — and I don't want to inter-
rupt your thought there, but to me this is the kind of option we
could give to producers to select that which is going to give them
the most protection.
Mr. Odom. The biggest concern that I have had — and the medi-
ans— we had, again, four or five medians there. The farmers want
to see a premium that is affordable. To me, if we could come with
a premium for that 75 percent coverage and 85 percent coverage
that was affordable, it would be a better option than increasing the
disaster provision of it.
I think what we are looking at is disaster provision that has kind
of been based on what we have been able to receive in the past his-
tory on disaster as disaster has been provided.
See, the advantage that an individual farmer has got on this pro-
gram, as I understand it, over the other disaster program is that
the other disaster program was on parish average. This is going to
be on an individual farmer's average, so that guy that makes a
much higher production, that farmer's average is going to have an
equal opportunity at that 50 percent than he would have had be-
fore. To me, that helps the program, but I can't answer the other.
I just don't know the answer.
Mr. EwiNG. Thank you.
Mr. Johnson. Mr. Baesler has gone to vote.
Mrs. Thurman.
Mrs. Thurman. Mr. Commission, I'm Karen Thurman from Flor-
ida. I have asked many of my different associations and groups in
Florida to kind of look over this bill, and they have some concerns,
particularly in the area of specialty crops because of the issue of
trees. In fact, one of our subcommittees had a hearing on that, and
we had people from all over this country to speak on some of those
kinds of things.
Have you all done anything with the specialty crops issue? In
particular, do you feel comfortable with the way that coverage is
under here?
Mr. Odom. We, too, have some specialty crops — strawberries —
similar to you and some of the other producers. In the insurance
coverage it would be the same offer offered under specialty crops.
231
Crops are being considered. I don't have that list. I don't remember
what they are.
But the advantage that I see, again, is this will give those farm-
ers at least a known disaster or an ad hoc disaster provision that
they know they are going to get a 50 percent and a 60 percent
price. They are not going to have to depend upon it being large
enough or big enough for a national disaster or for the money to
be provided by Congress.
I am told by the administration that they are going to continue
to work on those crops and bringing them into the program. To me
that's an advantage.
Mrs. Thurman. With the other issue of some of the specialty
crops or trees where, in fact, there is
Mr. Odom. Did you say trees?
Mrs. Thurman. Fruit-bearing tree of some sort. Something like
citrus. That comes to mind — where the fruit actually is being cov-
ered, however if the tree is damaged and killed it is a 5-year pro-
duction issue for them because they have to replant the tree, and
then, of course, it is a 5-year period of time — maybe less than that.
That is a big concern for them in these kinds of programs.
Mr, Odom. You know, we have just a little bit of an area that
grows a little naval orange.
Mrs. Thurman. We don't recognize it, but that's OK.
Mr. Odom. I understand. The problem that we have there is that
we have the freeze. We have a freeze that will come through, and
about 5 or 6 years ago it totally wiped that industry out and there
was very little protection and very little coverage, and that is a
concern for us.
I'm not sure that would be addressed in the insurance. The only
part that would be protected as far as I see here would be in the
ad hoc disaster provision.
Mrs. Thurman. Just so you'll know, when folks came from all
across the country on this particular issue there was a lot of con-
cern about that because there evidently had — before I was here,
there had been conversation that it, in fact, was being taken care
of; however, when the rules were done evidently that kind of crop
went out of there. So I just bring that to the attention that we have
actually given some language to talk about that, so if you can help
us through we'd appreciate it. And then we might talk about the
naval.
Mr. Johnson. I have been advised that our staff has been work-
ing with the nurserymen and the fresh fruit and vegetable folks
and will get comments for the record from the nurserymen directly,
and the gentlewoman from Florida may want to consult with Mr.
Limbaugh to see what else is going on in the citrus industry.
Mrs. Thurman. I can't respond to that.
Mr. Johnson. We have had a 10 minute warning.
Mr. Pomeroy, do you have anything.
Mr. Pomeroy. Yes. I'll be brief. I think we can get it in easily.
First, Mr. Chairman, I want to commend you for this hearing
and the series of hearings you have had. I apologize that another
meeting prevented me from attending the opening.
I have an opening statement I'd like included in the record, but
I won't read it.
232
Mr. Johnson. Without objection, your prepared statement was
placed in the record.
Mr. POMEROY. Thank you. Commissioner, I used to be a State in-
surance commissioner, and I can report some familiarity with the
loss adjustment issues that you allude to. I do think that the loss
adjustment is something that we need to look at should this pro-
gram move, making certain that losses are being adjusted in a uni-
form way and that companies are not competing for business based
on relative leniency in loss adjustment. That will be very important
to making this program actuarially sound.
I particularly agree with the part of your testimony found on
page three where you talk about the importance of bringing in par-
ticipation, increasing participation, particularly at the higher lev-
els, and that the subsidy for the buy-out is really a critical piece
of this picture if we are going to make the reform proposal work.
Would you care to elaborate on that just a bit?
Mr. Odom. If we don't get 85 to 90 percent participation, it is
going to be hard to ever make the program actuarially sound, be-
cause what you are going to be getting in that is the producers that
are in the top area that are going to have very smaJl ratio, based
on the fact — and I'm speaking of my State now because I am famil-
iar with that — ^based on the fact that in the past we have had it
on a parish average, and on a parish average the 3deld production
did not affect that loss ratio.
If we get those top producers that are in — ^and that's what we
have to do — we will see it, I believe, much more actuarially sound,
and then we know then from the history of the record of all of the
farmers what that premium has got to be in order to make it actu-
arially sound.
What I see as the Federal side of it is then coming in with
enough dollars to make it cheap enough to be affordable so that
farmer can stay in business and then that bank there is com-
fortable with him to make the loan so he can stay farming.
Mr. PoMEROY. It's absolutely right and absolutely essential. If
this is funded at an insufficient level, we'll merely be basically
prefunding catastrophic coverage, doing nothing to meet the insur-
ance needs of production agriculture. And that is going to have a
resulting farm credit implication, as well, which I think could be
very serious.
Mr. Odom. You're absolutely right.
Mr. PoMEROY. Thank you.
Mr. Johnson. Thank you. Commissioner Odom, for your work
with us on the subcommittee today. We appreciate your insights.
I have asked Ms. Long of Indiana to vote early and then come
directly back to pick up chairing this subcommittee so that we min-
imize the gap of time. I am going to go vote, but that should keep
the gap to a minimum.
The second panel is: Mr. Phil Bums, president of Farmers and
Merchants National Bank of West Point Nebraska, on behalf of the
ABA; Larry Diedrich, president of the American Soybean Associa-
tion of Elkton, South Dakota; Mr. James F. Hart, president and
CEO, Hand County State Bank of Miller, South Dakota on behalf
of the Independent Bankers Association; Mr. Chuck Merja of Sun
River, Montana, secretary-treasurer of the National Association of
233
Wheat Growers; Mr. Myrl Mitchell, chairman of the crop insurance
advisory task force, National Cotton Council, of Lenorah, Texas;
Ms. Katherine Ozer, director of National Family Farm Coalition of
Washington, D.C.; Mr. Doyl Rahjes of Agra, Kansas, president of
Kansas Farm Bureau, and board member of American Farm Bu-
reau Federation of Washington, D.C.; and Mr, Lee Swenson, presi-
dent of the National Farmers Union of Washington, D.C.
We would appreciate your coming forward. However, I am going
to recess the subcommittee momentarily to take care of this vote.
Hopefully we will be back in action very soon.
[Recess taken.]
Ms. Long [assuming chair]. We will reconvene, and we are going
to take Larry Diedrich first because he has to catch a flight.
We will begin with Larry Diedrich.
STATEMENT OF LARRY DIEDRICH, PRESIDENT, AMERICAN
SOYBEAN ASSOCIATION
Mr. Diedrich. Thank you. I appreciate it.
Good morning. My name is Larry Diedrich, as you indicated, and
I am a soybean, com, and hog producer from Elkton, South Dakota,
and currently serve as president of the American Soybean Associa-
tion.
We do appreciate the opportunity today to testify on behalf of the
Federal crop insurance program and to propose a few improve-
ments on the program.
Soybean producers traditionally have not been participating at
the level that they probably should be in the crop insurance pro-
gram. There are many reasons for that, but part of it is the percep-
tion, as was indicated earlier this morning, that better farmers —
it is not a good value for them, and that the people that are taking
crop insurance are taking it with the intention on using the crop
insurance.
However, I think over the last couple of years, with record losses
resulting from drastic weather patterns, coupled with improve-
ments that have been made in the program, this attitude has
changed with soybean producers. Many are reconsidering the op-
tion of crop insurance.
My brother and I are examples of that. We will be new partici-
pants in the Federal crop insurance program this year for the first
time, insuring both our soybeans and corn.
We have found several improvements in the program, including
the late and preventive planning coverage for soybeans, and with
our records we are able to utilize the actual production history
jdelds, which helps benefit us considerably.
However, I could recommend changing current policy for drilled
soybeans. It currently costs 25 percent more to cover drilled soy-
beans as opposed to conventional row-planted soybeans, even
though drilled soybeans produce higher 5delds.
Many producers in our region plant with the drill because of the
no-till, which is coming into practice. We feel we should not be pe-
nsdized for updating and improving our efficiencies.
Soybean producers, as well as other farmers, need risk manage-
ment tools to provide income security and stability. The Federal
crop insurance program could and should be a useful means for
234
doing just that. The administration's reform proposal is a step in
the right direction. Producers do need protection from catastrophic
disaster.
Under current budget constraints, ad hoc Federal disaster assist-
ance will become harder and harder to count on. The administra-
tion's proposal guarantees basic coverage for catastrophic disasters
to all producers at a very minimum cost. It also gives the farmers'
lenders assurance of guaranteed protection against extreme disas-
ters.
The administration's catastrophic plan in itself does not offer
complete risk management. We must improve the current crop in-
surance program to accomplish this. It is my understanding the ad-
ministration's proposal will continue to offer the options of addi-
tional coverage at the 65 and 75 percent levels at slightly below
current cost.
Many of our members would favor adding the option of an 85
percent coverage, as was indicated earlier this morning. In addi-
tion, all graded yields should be based on actual production history.
Test counties in 24 saving producing States now offer the group
risk plan. Although participation has not been great and it is too
early to really assess how this program is going to work, we do
have some concerns with this particular test plan by fact that if a
small amount of farmers in one side of the county have either a
flood or hail or something like that and it affects their production
considerably, whereas the whole county is not affected a great deal,
those people would not be covered to the extent that they need to
be, so it does have some weaknesses in that area. I will admit that
views on this do vary region by region.
Views and concerns regarding the provisions in the administra-
tion's reform package vary region by region, as producers. However,
I would like to mention three special significances mentioned by
our membership.
First, in the deUvery of the program: Opinions differ on the pre-
ferred choice of delivery for crop insurance. As you know, most pro-
ducers in my region would prefer private companies handling crop
insurance. However, in the South where there have been problems
with some agents and companies, many producers feel ASCS or the
proposed Farm Service Agency should manage these insurances.
My hope is that, regardless of who offers the insurance, that it
be handled consistently and that handlers be responsible and ac-
countable for policies, as was mentioned also earlier.
Second, when we talk about linkage of crop insurance to farm
programs: currently under the proposal it is a very minimal fee to
sign up for the crop insurance, but farmers do have concerns that
it is the program now, we do not know what that program is going
to be in the future, and there are concerns that if we set the prece-
dence of mandating a linkage to farm programs that, as this pro-
gram may change, that precedence may stay with it. There is some
concern in that area.
In the area of price selections, many of our members, particularly
in the South, are not satisfied with the current pricing formula sys-
tem. They favor price selection more reflective of local prices. For
example, the highest price selection in my State is $6. That is a
fair price for me. However, $6 is probably not the right price for
235
down in Louisiana. They may need $6.50 to cover their higher
input cost and better reflect their market basis.
If there are suggestions, there may be a suggestion to change
that and make sure we have a wide enough price range to adapt
to every farmer's needs.
I do appreciate this opportunity to be here today and to express
some views and concerns of the U.S. soybean producers regarding
the Federal crop insurance program. I do not envy the committee's
challenge as you tackle the growing need to improve our system
and wean producers from ad hoc disaster assistance.
I would be happy to provide additional information on other as-
pects of the proposal or the current crop insurance program as
needed.
Thanks again for this opportunity,
[The prepared statement of Mr. Diedrich appears at the conclu-
sion of the hearing.]
Ms. Long. Thank you, Mr. Diedrich.
Since you do have a very tight time constraint, if there are any
questions we will present those for you.
Mr. Diedrich. I appreciate that.
Ms. Long. There are no questions, so, without objection, if any
do come up with other members as they return from the vote, we
will submit them to you and your response will be submitted for
the record
Mr. Diedrich. Thank you very much.
Ms. Long. Thank you. Our next panelist is Mr. Phil Bums.
STATEMENT OF PHIL BURNS, PRESIDENT, FARMERS AND
MERCHANTS NATIONAL BANK, WEST POINT, NE, ON BEHALF
OF THE AMERICAN BANKERS ASSOCIATION
Mr. Burns. Thank you. Madam Chairman.
Members of the subcommittee, I am pleased to be here today on
behalf of the Americ£m Bankers Association to participate in this
hearing regarding H.R. 4217, the Federal Crop Insurance Reform
Act of 1994.
My name is Phil Bums, and I am president of the Farmers and
Merchants National Bank in West Point, Nebraska, and we are lo-
cated about 50 miles northwest of Omaha. I currently serve on the
American Bankers Association Agricultural Bankers Agricultural
Bankers Executive Committee. My bank has $65 million in assets,
and a loan portfolio of $50 million, of which about $35 million are
loans directly to agricultural producers. Crops in our service area
include com, soybeans, and alfalfa.
Like many other banks across the Nation, we own a full-service
insurance agency which we bought about 4 years ago; however, we
have been selling crop insurance for the past 10 years, as we en-
tered that business several years before we bought the full-line in-
surance agency.
As many of you know, the American Bankers Association is the
national trade and professional association for America's commer-
cial banks, from the smallest to the largest. ABA's members rep-
resent about 90 percent of the industry's total assets. Approxi-
mately 94 percent of ABA members are community banks like ours
236
with assets of less than $500 miUion. Over half of ABA's 12,000
members have important agricultural concerns.
It is good to be here today to make a brief statement and to an-
swer any questions you may have.
To begin, the banking industry would like to commend Chairman
Johnson, Congressman Combest, and the entire subcommittee for
looking at ways in which we can effectively address crop insurance
and disaster assistance issues. Further, America's small and large
banks support adequately funded crop insurance reform at the Fed-
eral level.
Your interest in improving the crop insurance program by pro-
viding reliable catastrophic coverage on the basis of individual
farmer's needs and reducing unreliable ad hoc agricultural disaster
programs is a good move for our Nation's farmers and for the rural
communities about which we are all concerned.
Emphasis on crop insurance sales through the private sector
wherever possible is also a step in the right direction.
Banks across the country are primarily concerned about the
availability of crop insurance which can be consistently and effi-
ciently used as collateral. We know that dependable crop insurance
can and frequently does mean the difference in whether banks are
able to approve operating loans and other types of credit for farm-
ers who are struggling to stay ahead in high-risk situations and in
challenging agricultural markets. !
Like many other banks, our bank is an active participant in j
Farmers Home Administration guaranteed lending programs. !
Farmers Home requires the purchase of crop insurance before I
loans can be processed. ;
We join other banks across the country in looking for ways to :
help beginning farmers and ranchers, in particular, who are often ;
high-risk borrowers. Adequate crop insurance coverage helps us to ;
continue to serve these and other customers. |
Mr. Chairman and members of this subcommittee, commercial '!
banks join you in looking for ways in which cost-effective and reli-
able types of crop insurance can be made available at reasonable '
prices. Crop insurance is one of the Government-assisted programs \
utilized by commercial banks to effectively serve rural economies, i
The banking industry is interested in working with you to con- '
sider reasonable ways in which we can continue meeting the var- :
ious needs of all rural communities. I
Mr. Chairman, in closing, American bankers are interested in i
working with you and members of this subcommittee to advance an i
adequately funded and reliable crop insurance program which can |
meet the various needs of the farmers we serve. ,
Thank you for this opportunity to express the concerns of small l|
and large banks across our Nation. '
Attached to my printed statement are specific responses to your ;
questions regarding H.R. 4217. i
I would be happy to address any questions at the appropriate ;i
time. I
Thank you. '
[The prepared statement of Mr. Bums appears at the conclusion
of the hearing.]
237
Mr. Johnson [resuming chair]. I think Mr. Diedrich had to leave
to catch a plane, as I understand, so we will proceed next to Mr.
Hart.
STATEMENT OF JAMES F. HART, PRESIDENT AND CEO, HAND
COUNTY STATE BANK, MILLER, SD, ON BEHALF OF THE
INDEPENDENT BANKERS ASSOCIATION OF AMERICA
Mr. Hart. Thank you, Mr. Chairman.
Mr. Chairman and members of the subcommittee, my name is
Jim Hart. I am president and CEO of the Hand County State Bank
in Miller, South Dakota. I am pleased to be here today to testify
on the administration's crop insurance reform proposal on behalf of
the Independent Bankers Association of America, better known as
IBAA.
IBAA is the only national trade association that exclusively rep-
resents the views of the Nation's community bankers. I will abbre-
viate my remarks, Mr. Chairman, and submit my entire statement
for the record.
Mr. Chairman, let me begin by congratulating you on your elec-
tion as chairman of the Subcommittee on Environment, Credit, and
Rural Development. All three of these subject areas — environment,
credit, and rural development — are critical to the future of the
State of South Dakota. So, from strictly a personal standpoint, if
you will excuse this expression, we've got you right where we want
you.
But we also thank you, Mr. Chairman, for making crop insurance
reform one of your earliest priorities in this subcommittee and for
scheduling this hearing today.
Reforming the Federal crop insurance program is certainly not
an easy task, and we are grateful to you for taking the initiative
to move this process forward.
First, bankers use crop insurance. Crop insurance is important
to agricultural bankers because many of us use it to collect collat-
eral on operating loans. To put it very simply, we would rather
lend on a contract than a promise.
A crop insurance policy is an effective and reliable backstop for
agricultural loans, while ad hoc disaster payments, which may or
may not be there when needed, are not.
Your proposal is fundamentally sound. Is the reform legislation
on the table perfect? No. Not by any means. Is it IBAA supported?
Yes, 100 percent.
While some of us may want to take around the edges of the pro-
posal, the underlying concept that combines disaster relief and crop
insurance to form one catastrophic protection program for all farm-
ers is such an improvement over the existing system that it should
not be jeopardized by our desire to make it perfect.
Farm subsidies are in decline, Mr. Chairman. At last year's Agri-
cultural Outlook Conference, Secretary of Agriculture Mike Espy
said, "I have seen the handwriting on the wall. U.S. budget support
to agriculture will continue to decline. They can scream, they can
curse, they can lambast, and sometimes even cause delays, but the
fact is that U.S. budget support for agriculture will continue to de-
cline."
238 '
I
This was never more evident than during last year's appropria- ;
tions process when two very popular and traditional farm pro- '
grams — the wool and mohair program and the honey program — '<
were abolished. What is next? Tobacco? Peanuts? Cotton? Rice? ;
Wheat? It is anybod/s guess. i
With this prospect being laid directly on the table, it becomes i
even more imperative for farmers and ranchers to begin to manage j
their farm risks more prudently. i
Having said that, Mr. Chairman, let me briefly address severed i
features of the bill in more detail and make some recommendations :
for making the package a more effective risk management program |
for our Nation's agricultural community. 1
First, repeal disaster authority. Authority for ad hoc disaster pro- i
grams must repealed. Without this, no reform package will work. I
It is just that simple. So long as farmers and ranchers know that i
if financial disaster strikes they can easily count on the Federal i
Government to bail them out, there is no incentive for them to pur- :
chase crop insurance — and who can blame them?
If Congress passes everywhere just crop insurance reform pro- i
posal but fails to terminate the authority for ad hoc disaster pro- |
grams, the reform proposal simply will not work. There will be no i
incentive for farmers to self-protect, and a vicious cycle of annual ■
ad hoc relief programs will continue. !
Second, cross-compliance is also a key. We strongly support the j
cross-compliance features of the proposal and feel that this is, too, i
a key to the program's success. You cannot go out and buy a house j
today and get a loan without first buying fire insurance. You can't ,
buy a car off a lot without auto insurance.
If the Federal Government invests in the farmer/rancher through
subsidized loans, deficiency payments, CRP, or anything else, the i
Government has the right to protect that investment by requiring i
producers to carry crop insurance.
Three, we believe price competition is good. We support the pro- 3
vision that allows more efficient insurance companies to reduce i
rates charged to farmers and ranchers. Price competition is fun- c
damental to the free market system. It has worked in every sector i
of our economy and has ensured American's the highest quality ;
product and service at the lowest possible prices. We believe price :
competition would have the same effect on crop insurance. |'
We believe dual delivery system is a concern. Along these lines, '5
while we support the feature of the bill that requires farmers to
purchase higher coverage policies exclusively from private agents, )
we have some concerns about delivering the basic catastrophic cov- 1
erage programs through Federal offices. r
Many of us remember when crop insurance was sold in ASCS of- \\
fices. This was not a good situation. ASCS employees did not have |'
at that time — and probably will not have in the future — expertise li
nor the incentive to deliver these products in an efficient, conscien- c
tious manner. The resultant attitude will be, in my opinion, the \i
same, and many producers will not get adequate guidance on other ]i
buy-up opportunities that might better suit the individual require- n
ments.
We should make crop insurance funds mandatory. We support
moving crop insurance from discretionary to the mandatory account i:
239
to make it less vulnerable to political manipulation. Under current
law, the crop insurance program is a hostage to the appropriations
process. If crop insurance is going to be the only risk protection
program available to farmers and ranchers, they must have the full
faith and backing of the Federal Government by moving it over to
the entitlement accounts.
The IBAA supports supplemental products, Mr. Chairman. We
believe that expanded authority should be given to the private sec-
tor to develop programs and policies to provide higher levels of pro-
tection at affordable prices.
One concept IBAA has endorsed is the concept of disappearing
deductibles under which the deductible grows smaller as losses
grow larger, so that if a farmer has 100 percent loss, he or she
would receive 100 percent indemnity.
Another idea is converting the program from jdeld basis to in-
come basis. Buying dollar coverage per acre is a concept easily un-
derstood by both the producers and the lenders, and it provides an
insured catastrophe in which credit could be easily assessed.
In conclusion, the administration's crop insurance program will
take the public/private partnership that already exists and
strengthen it to the benefit of our Nation's farmers and ranchers
and the communities they serve. In the process, it will save tax-
payers over $750 million over 5 years. That would be hard to beat.
We hope that you will take advantage of this opportunity to pro-
vide long-term protection to American agriculture, including farm-
ers, ranchers, lenders, agribusiness, and Main Street America shop
owners by approving the administration's crop insurance reform
proposal.
Thank you again, Mr. Chairman, for the opportunity to testify on
behalf of our Nation's community bankers. I would be happy to re-
spond to any questions you may have.
[The prepared statement of Mr. Hart appears at the conclusion
of the hearing.]
Mr. Johnson. Thank you, Mr. Hart.
We will proceed next to Mr. Merja.
STATEMENT OF CHUCK MERJA, SECRETARY/TREASURER,
NATIONAL ASSOCIATION OF WHEAT GROWERS
Mr. Merja. Thank you, Mr. Chairman.
My name is Chuck Merja, and I am from Sun River, Montana.
We, on our farm, have utilized crop insurance since well before
the last reform in the early 1980's. We raise wheat and barley.
I want to thank you for the opportunity to present our views
today to the subcommittee. I am serving as secretary/treasurer of
the National Association of Wheat Growers. That association has
felt that a Federal crop insurance program that was revised and
workable has been a long-time goal of our association, and we sup-
port the reform proposal contained in the administration's 1995
budget request.
I would remind you, 55 years ago the first commodity covered by
Federal crop insurance was wheat. We are familiar with the ad-
ministration's proposal and think that it is a very good starting
point for a viable program.
240
In standing behind the fundamental concept that provides for
low-level catastrophic coverage of all farm program participants,
we are taking a bold step that many of us have previously been un-
willing to take. But we think, with continued budget pressures fac-
ing all Grovemment programs and the solid policy reasons favoring
an insurance approach to disaster relief, we believe the time is
right to consider change to a single, predictable approach to disas-
ter relief.
The administration's approach reflects truthful budgeting, budget
discipline, and good public policy, improved risk management op-
tions for farmers, and reduced cost for taxpayers. However, the Na-
tional Wheat Growers is unwilling to step completely away from
standard disaster authority unless and until the program is proved
to be effective.
Extensive debate has already occurred as to who delivers this
program. I think I have even learned a little bit more here today
about that from Mr. Diedrich.
In Montana we are very comfortable, and in the wheat country
we are very comfortable with a dual delivery system. In my State
I would predict that the agents would be the deliverers because we
have a fair coverage of agents, and also 90-some percent of our
acres are involved in crop insurance. In other areas — even in other
wheat areas — that isn't the case, and so ASCS may be a better de-
livery system in those areas.
We are concerned about linkage. We understand the issue of
linkage, but we are concerned that the costs remain as they are
and not begin to reflect risk acreage or crops. As Mr. Diedrich said,
if we change the program and continue the linkage, there is some
concern that we will get tied into a program that may or may not
be adequate or something that we care to participate in.
With regard to new crops, we understand that FCIC — and would
encourage FCIC within its limits to look at new crops. One that we
would suggest is for seed wheat. We have many producers that
raise wheat that is of significantly higher value than current mar-
ket price elections and are not able to insure that entire risk.
National Wheat Growers participated in a crop insurance task
force 2 years ago that recommended the 4-year building to 10 ac-
tual production history plan. As such, we are supportive of how the
plan benefits producers with good production history who have
been blessed with good production in the past few years.
However, the change to the new, more aggressive APH formula
has not been without pain. Whether or not a reform package moves
through Congress, the highest priority for FCIC should be to de-
velop and implement an affordable catastrophic yield clause that
puts the brakes on yield declines for producers with multiple cata-
strophic losses.
I would just point out that in 1984, 1985 — since the reform pack-
age went through, in 1984, 1985, 1988, and 1992, my particular
county was declared a disaster county. I'm still using those yields
in my APH election, even though we have recognized, through the
disaster status, disaster recognition, that those were significant
anomalies in the weather.
At the same time, the administration's decision to base cata-
strophic yield coverage from individual APH jdelds as opposed to
241
counting averages is a vital and important component of the cur-
rent reform package. Again, whether or not reform goes through,
we think that FCIC should implement a de minimis yield clause.
Lack of that really causes problems in small grain country.
We would also encourage FCIC to use its authority to become
even more customer oriented, and issues that would, in our mind,
come to the friend there would be the seed wheat policy, the de
minimis jdeld, and maybe a look at a gross revenue insurance of
some sort. We think they could do that without having authority.
They already have authority to do that.
In that regard, more flexibility in the market price election would
be very helpful, too. There really needs to be a better mechanism
to deal with the different values of wheat that we raise in this
country.
Thank you very much. I would take any questions.
[The prepared statement of Mr. Merja appears at the conclusion
of the hearing.]
Mr. Johnson. Thank you, Mr. Merja.
We'll turn next to Mr. Mitchell.
STATEMENT OF MYRL MITCHELL, CHAIRMAN, CROP INSUR-
ANCE ADVISORY TASK FORCE, NATIONAL COTTON COUNCIL
OF AMERICA
Mr. Mitchell. Thank you, Mr. Chairman.
My name is Myrl Mitchell. I'm a cotton producer and ginner from
Lenorah, Texas, and I utilize the multiperil crop insurance pro-
gram as a risk management tool for my operation.
I serve as a member of the board of directors of the National Cot-
ton Council and as chairman of its crop insurance advisory task
force. We commend you for holding this hearing.
In the interest of time, I will summarize my written testimony.
The National Cotton Council supports the concepts included in
the Secretary of Agriculture's crop insurance reform proposal. Obvi-
ously, the Devil is in the details. I must caution, however, that
many cotton producers are skeptical that a workable crop insur-
ance program can be developed.
It is critical that FCIC staff continue to listen carefully to reason-
able concerns and develop provisions that truly make the crop in-
surance program useful to all farmers. It is not possible to design
a one-size-fits-all policy.
We are actively working with other commodity groups seeking
full funding for the plan. Without adequate funding, the new pro-
gram cannot provide improved risk management for producers.
While our industry supports the administration's catastrophic pro-
gram as the principal mechanism for reform, we also maintain that
flexibility with different coverage options is necessary to increase
participation and meet specific regional and crop needs.
Most cotton farmers would be interested in the higher levels of
coverage. In fact, many irrigated operators are interested in cov-
erage at 95 percent of actual yield. Consequently, we would support
efforts to further reduce the cost of higher levels of coverage. While
skeptical of the precedent, producers have generally accepted the
voluntarily mandatory aspect of the plan, which requires payment
242
of a $50 processing fee for coverage for participating in farm pro-
grams.
We support the option for producers to buy the basic level of cov-
erage at its local farm service agency or through private insurance
agents. We understand buy-up coverage would only be available
through private insurance agents.
Mr. Chairman, in anticipation of action on crop insurance reform
this session, the cotton industry has hosted or participated in a se-
ries of meetings throughout the cotton belt to hear comments from
producers on the Secretarj^s reform plan. I participated in a ses-
sion in Lubbock organized by Mr. Combest and one in Abilene or-
ganized by Mr. Stenholm. FCIC Manager Ken Ackerman and mem-
bers of his staff attended each meeting. The remainder of my testi-
mony will focus on common concern raised in those sessions.
First, producers believe that the program should include a cata-
strophic yield adjustment when calculating actual production his-
tories which include years with disaster provided their was a work-
man-like effort. Thanks to encouragement from members of this
committee, FCIC has recognized this problem and has developed an
actuarially sound proposal that is under consideration. Upon initial
review by our industry, FCIC's approach has merit.
Second, the addition of a harvest incentive and a de minimis
yield would enhance the operation of crop insurance in many areas.
One suggestion would be to allow producers to harvest the crop and
not count the production equated the cost of harvest against any
loss for crop insurance payment purposes.
Consideration could also be given for third party verification on
zero or disaster yields.
In addition to improving the program, harvest incentives benefit
the processing and marketing industry segment. On the other
hand, a reasonable de minimis 3deld provision would help in areas
which lose their crop early in the season.
Third, there are optional products that could further enhance the
value of crop insurance to the producer. One of the points made at
many of the regional meetings was the need to have programs that
will entice producers to buy up or offer them alternative coverage.
One concept particularly interesting to our industry is a program
based on insuring cost of production. We have received encourage-
ment from FCIC to continue to pursue this approach.
Consideration should also be given to premium setting flexibility
on irrigated operations which constitute lower risk. We also sup-
port a provision allowing individuals to transfer actual production
histories to similarly classed farms rather than being assigned an
insured yield of 65 percent. We believe participation would increase
if these matters received attention.
Fourth, often losses in crop quality are more economically dev-
astating than production losses. Improvements in the quzdity ad-
justment provisions for cotton are needed to make it more effective.
Fifth, the administration proposal should address farm units —
that is fields and/or sections. While we realize that unit coverage
could impact how the subsidy is distributed, we maintain that con-
sideration of smaller, better-defined units will improve the program
and make it more effective. We strongly support unit coverage be
243
offered as a means to entice producers to buy up from the basic cat-
astrophic coverage.
For crop insurance reform to be successful, credibiHty must be re-
stored to the program. Abuse of the program must be minimized.
FCIC recognizes this HabiHty and is seeking ways to strengthen its
review. We support effective oversight so that benefits accrue to
those who deserve it.
Thank you again, Mr. Chairman, for allowing me to present tes-
timony here today on behalf of the cotton industry.
I would be happy to answer any questions you or other members
of the subcommittee might have.
[The prepared statement of Mr. Mitchell appears at the conclu-
sion of the hearing.]
Mr. Johnson. Thank you, Mr. Mitchell.
We will turn next to Ms. Ozer,
STATEMENT OF KATHERINE OZER, DIRECTOR, NATIONAL
FAMILY FARM COALITION
Ms. Ozer. Thank you, Mr. Chairman.
My name is Kathy Ozer. I'm the director of the National Family
Farm Coalition, which represents 39 family farm and rural advo-
cacy organizations around the country. We were formed in 1986 to
provide both a link and a voice for family farmers in the debate
over Federal farm and food policy.
I have testimony in addition to mine to submit for the record
from two of our members groups: Dakota Rural Action in South
Dakota, and Dakota Resource Council in North Dakota. I would
ask, if it is possible, to leave the record open for additional com-
ments.
Mr. Johnson. Without objection.
Ms. Ozer. I am testifying here today to strongly support a
change in the way Federal Government prepares for and responds
to disasters which strike at the livelihood of family farmers. Farm-
ers need a farm policy that works and a disaster and/or insurance
program that is both accessible and affordable.
NFFC supports the USDA proposed disaster and crop insurance
program with a few changes. In particular, in response to one of
your questions, we support the Federal Crop Insurance Reform Act
of 1994 provision that would require catastrophic coverage for par-
ticipants in any USDA farm program.
The package of coverage needs to provide at least a certain level
of economic security for producers of all crops in all regions.
An issue that has come up by many of the witnesses already
today is the whole issue of the funding for that program. We would
raise that also as an issue in terms of whether the actual funds are
an entitlement in the budget in exchange for removing the emer-
gency off-budget nature of current agricultural disaster proposals.
If this is not the case, there is certainly the risk that the funds
would not be available, which would undermine this whole system.
The other major question that has been raised by our disaster
task force that has reviewed the proposal is: What happens before
the catastrophic disaster coverage kicks in? Our understanding is
that private crop insurance sold through crop insurance agents or
ASCS would be available.
V
244
The critical question, however, is: At what price? Our concern is
the price to the farmer struggling to meet cash flow and budget
projections, and to the Federal Government in the form of the sub-
sidy payments to provide the actual insurance premium.
It is in this area that many of our farm leaders who have worked
on these issues for many years have come up with a possible pro-
posal that would help farmers self-insure against some of their pos-
sible losses. It would be through an expansion or a revised version
of the current farmer-owned reserve that would actually establish
a level of a grain reserve that could be accessed if a certain loss
level was met.
This is an issue that we have not totally fleshed out, but our
sense would be that when a farmer had a certain loss level, that
could be accessed. In addition, a farmer could also be enrolling in
the private crop insurance program, but this would be basically at
a middle level.
We would ask the subcommittee to actually look at some of the
costs to the Federal Grovemment of what the crop insurance cov-
erage and the return in terms of farm income would be in that mid-
dle range before you hit that 50 percent loss level, but in between
in sort of that 50 to 70 percent range. I think that is the area
where there are the most concerns since that is the kind of level
of loss that most producers are incurring with too frequent regular-
ity.
The other concern that has been raised is: Who actually needs
to be covered in this whole program both in terms of disaster cov-
erage and the crop insurance availability? One of the issues that
came up this past year and continues to be a concern is: What hap-
pens to fgirmers who have made a transition in their farming prac-
tices? What happens to the farmer who is now producing for a local
farmers' market and has lost some of those 4 to 10 years or that
length of reporting and is actually more involved in the actual mar-
keting of their product as opposed to the wholesale marketing?
How are some of those issues addressed?
Another concern relates to minority farmers who have histori-
cally been underrepresented in both access to farm credit and Fed-
eral farm programs. How do we ensure that they do have access
to the types of disaster programs that we are looking at?
Another issue relates to contract growers who, in many cases,
have not been adequately covered as a result of their whole con-
tractual relationship and who actually own the Uvestock or the
poultry as opposed to the time and the energy and the expenses
that have been put into the process?
Those are some of the issues that — ^we want to make sure, as the
group representing family farmers, that those are some of the types
of farmers that, in fact, are getting adequately covered by the pro-
grams.
In my written summary I go into testimony in more detail, but
one of our concerns is that there were certain constituencies in
groups of farmers who did not get the kind of benefits that they
needed during the existing dissister program. How do we make sure
that gets corrected in the new program?
An issue raised before had to do with some of the cotton quality
issues. We would say that's a major issue in terms of hay quality.
245
What happens in terms of the availabUity of feed for livestock pro-
ducers who have not themselves incurred a massive loss but they
are paying the price through their various other inputs that they
need?
Another issue is the whole availability of information to farmers
about the existing disaster programs. We would urge the Depart-
ment to be much more aggressive in getting that information out
both to farmers who need access to those programs and to their
own employees who need to be disseminating that information and
being the on-the-ground experts when there are problems and is-
sues raised.
We appreciate the opportunity to testify today. We strongly sup-
port a comprehensive approach to both disaster and farm policy.
We will work in whatever way we can to try and push for increased
appropriations for this imp>ortant program and work through the
budget process, but we remain very concerned about shifting away
from what we have now and into something else unless there is a
sense that it, in fact, will solve many of the problems that we have
in front of us.
Thanks for this oppK)rtunity.
[The prepared statement of Ms. Ozer and testimony of Dakota
Rural Action and Dakota Resource Council appear at the conclu-
sion of the hearing.]
Mr. Johnson. Thank you.
We will go next to Mr. Doyle Rahjes.
STATEMENT OF DOYLE RAHJES, PRESmENT, KANSAS FARM
BUREAU, AND BOARD MEMBER, AMERICAN FARM BUREAU
FEDERATION
Mr. Rahjes. Thank you, Mr, Chairman.
I am Doyle Rahjes. I am the president of the Kansas Farm Bu-
reau and on the board of directors of the American Farm Bureau
Federation, and I am a producer from Agra Kansas.
I certainly want to thank you and the members of this sub-
committee for the opportunity for us to be here today and what you
have done previous to this in getting the information together for
you to move forward in this very, very important area.
I would like to begin by indicating to you that we generally sup-
port this proposal as set forth in H.R. 4217. We have prefiled our
statement, and I'm not going to read the statement. I'm going to
make a few comments and, of course, be ready for questions if need
be.
I would want to tell you that in our last annual meeting, which
was held in January of this year in Fort Lauderdale — ^that's the
American Farm Bureau Federation — ^we continued to affirm our po-
sition that both the disaster program and the Federal crop insur-
Eince program should be put together. I think this leads me to a
conmient that I would maJte regarding whether or not farmers are
going to accept it or not.
First of all, actuarial soundness is extremely imjwrtant for this
program to work. I was on the Federal Crop Insurance Improve-
ment Commission in the late 1980's, and certainly this is one of the
things that came up through that commission. We still have not
been able to achieve it.
246 1
But let me say that if the signal is sent by Congress to the Amer- j
ican public — specifically, to farmers and ranchers — ^that this is a ;
budget item, and that there is not going to be an outside-the-budg- j
et appropriation for disaster, the farmers will hear it. They will |
hear.
There is going to be some action by the Congress when a disaster j
occurs, and then whether there is an off-budget appropriations that i
will be made for disaster, and then, in fact, that it is denied, then i
the farmers will believe it. I think that's a p>oint that we need to I
remember as we look at the success of this program which we i
think should be actuarially sound.
We do have a few reservations about the program that I would \
like to mention to you. Most of them are around the eligibility \
tests. We are concerned that basically they may be unnecessary.
First of all, we believe that the program should be voluntary. The i
reason: If it is voluntary, then you are going to have people partici- j
pating in a program that they feel good about.
And £is we think about the linkage that is tied to Farmers Home, |
Federal crop, and other price support programs, we feel that this
is a tjrpe of coercion that certainly will not help the program to be-
come actuarially sound. The participation will not be there unless
absolutely forced, and we just don't believe that is in order.
Means testing is unattractive at any level. The $2 million means
test sounds big, and it is, but I would remind the committee — and
many of you will remember — ^that the $100,000 means test was
tried in the previous farm bill, and there was a lot of difficulty with
it.
I just indicate to you that it is going to create an area that i>eople
are going to be concerned about, and when they look for budget
cutting and that sort of thing, that would be a place to look. So
means testing certainly is not attractive.
Pa5anent limitations are troublesome when we think about the
$100,000 limitation. Certainly that could, in the minds of some —
when you look at a tremendous disaster progrsim that comes across
this country, $100,000 may not be enough. So that could at least
crack the door open for an off-budget type of appropriation, and
therefore create the old problem again that participation really is
not necessary in this program.
I think there are otner areas that we look at — ^reliance on a yield
ELS opposed to a dollar basis for pay-outs. There is no question that
this can skew the program to the lesser productive acres, and we
believe that if you would go on a dollar baisis that this certainly
would take that out of the picture and it would not be a temptation
to use those under-productive acres.
Another area that we would mention, which has been brought up"
by the member of your committee from Florida — just as a technical
observation — specialty crops certainly do need to be considered, es-
pecially as it relates to those crops which may not produce in one
year, and also those crops that may produce severaJ harvests in one
year.
With that, Mr. Chairman, I would stand for questions.
[The prepared statement of Mr. Rahjes api)ears at the conclusion
of the hearing.]
Mr. Johnson. Thank you, Mr. Rahjes.
247
Joining us today in lieu of Mr. Swenson is Ms. Nancy Danielson,
who is a legislative analyst at the National Farmers Union.
STATEMENT OF LELAND SWENSON, PRESIDENT, PRESENTED
BY NANCY F. DANIELSON, LEGISLATIVE ANALYST, NATIONAL
FARMERS UNION
Ms. Danielson. Thank you, Mr. Chairman.
I don't apologize for who I am, but I am sorry that Lee Swenson
couldn't be here this morning. He was hoping to be able to testify
himself.
I am a lifelong member of the National Farmers Union, and I am
here to tell you that we are generally very supportive of the provi-
sions of H.R. 4217.
The testimony today will address 10 issues: Repeal of the ad hoc
disaster, establishment of catastrophic coverage, linkage to farm
programs, the delivery system, industry competition, assistance for
uninsurable crops, actuarial soundness, budget authority, adequacy
of higher levels, and the advisory committee created by this legisla-
tion.
First of all, we are generally supportive of the repeal of ad hoc
disaster but, like Mr. Diedrich, we would condition that on the fact
that catastrophic coverage remain at £in affordable price. We also
suggest, as the bill does, to keep the authority for uninsurable
crops.
Second, as to the adequacy of catastrophic coverage, we like the
fact that this bill allows producers to choose between using APH
or using area yield. We would like to go one step further and re-
quire that both are offered. As is currently in the bill, it says the
producer may choose as long as both are offered, but we would like
to require that both be offered.
Like Mr. Merja, we would like to have disaster declared years ex-
cluded from APH.
We would also like to make one additional improvement. We
would like the price election to be up to 100 percent of the expected
market price rather than 60 percent of the expected market price.
We feel that if the coverage is too low, it won't actually meet the
goal of obviating the need for disaster assistance.
I guess one additional question that I had that is not in our testi-
mony is the question as to whether or not catastrophic assistance
will be available even if only one producer in a county suffers a dis-
aster. I would hope that it would be available.
The third issue, linkage to the farm programs: You will note in
the special order of business that we have attached to our testi-
mony that our delegates at our national convention supported hav-
ing it as a benefit of farm program participation, and they even
went as far as to support requiring the catastrophic level. But,
again, they would be supportive as long as the cost of participation
is limited to the currently proposed $50 per crop per county, with
a cap of $100 per producer per county.
Four, as to the delivery system, the question of dual delivery
raises some additional issues. First of all, who will do the adjust-
ing? Who will pay the administrative cost if the producer first ob-
tains coverage from the farm service agency and then goes on to
the private agent?
248
We also support waiving the administrative fee for those who!
sign up for coverage greater than the catastrophic level. We believe
it is very important to encourage producers to sign up for a level
of coverage greater than that catastrophic level.
Five, we support the provision which allows industry competi-
tion. We like the fact that insurance companies are allowed to offer
up to 85 percent of APH or 95 percent of area yield. We think this
more closely approaches the cost of production, and we think that's
a very positive inclusion.
Six, we do support providing a permanent disaster program for
uninsurable crops or crops where the catastrophic level is not avail-
able. But we think that you should require that a crop have some
history on land before it can be insured. What this will do is pre-
vent a farmer from speculating on some new crop that has never
been grown on that land before, with the knowledge that they can
always receive crop insurance. We believe this will add actuarial
soundness to the program.
We support the goal of approaching actuarial soundness, and we
believe using APH will really help out in achieving that goal.
We certainly hope that the budget authority will be granted as
requested by the administration, and we would point out that
would achieve savings of $750 million up to $1 billion over a 5-year
period.
As to the adequacy of higher levels of coverage, we support allow-
ing producers to choose up to 65, 75, and 80 percent levels of cov-
erage, and we recommend that a premium subsidy is offered to en-
courage producers to choose these higher levels. I don't believe
that's in the current bill, and we hope that will be added.
We like the fact that loss of yield and preventive planning is cov-
ered. We would like to add quality loss coverage, and we would also
point out that separate units are important. For example, dry land
wheat should not be treated the same as irrigated wheat in looking
at yield coverage.
We support the addition of a Federal advisory committee, but we
would like to ask that at least one-half of those people on the board
be family farmers.
In summary, I'd like to say that I think this bill might be suc-
cessful for the very example that our president from the Minnesota
Farmers Union gave. He pointed out that even though he tradition-
ally buys a low level of catastrophic crop insurance program, he
has never been able to collect on that, even last year when he had
the worst disaster ever. He thinks the fact that a program like this
will provide him that coverage, he can then use his additional dol-
lars which he would have spent on the low-level coverage to buy
up.
If there are other producers in the midwest where participation
is traditionally lower that have the same feeling, then I believe
your will be very successful in getting the widespread participation.
[The prepared statement of Mr. Swenson appears at the conclu-
sion of the hearing.]
Mr. Johnson. Thank you.
I want to thank all the members of this panel. I think your in-
sights are very helpful to the committee.
249
Let me just ask a question to those of you who may choose to
respond.
All of us would like to have as much premium subsidy as pos-
sible for the buy-up, because I think we all agree that in most
cases catastrophic coverage is not going to be entirely adequate.
On the other hand, there is a possibility that we may not have
the money to utilize that the administration has requested. We
may come in with less money than what the White House wants,
what Mr. Espy wants.
If something had to give, would you recover that financial short-
age by reducing the level of the catastrophic coverage and retaining
a partial subsidy for the higher coverage? Or would you use the
money first of all to make sure that 50 percent catastrophic cov-
erage is, in fact, provided and pare away some of the subsidy for
the buy-up?
It is a choice no one wants to have to make, but if you were con-
fronted with that kind of choice, I wonder if any of you have any
comments or if it is too awful a possibility to even consider.
Mr. Merja. Mr. Chairman, at first glance I would ask you to
keep the money in the buy-up instead of in the catastrophic cov-
erage for the reason that people still are going to need to make
management decisions, and they can choose to make those manage-
ment decisions after the catastrophic coverage is there and so mini-
mize the money in the catastrophic coverage and put the money
where people are already using the crop insurance.
Ms. OzER. I would have to disagree because it seems like if the
money isn't there we won't have an adequate catastrophic program,
so we have to figure out what is that. If the alternative is removing
the ad hoc disaster situation, we could be caught in a very precar-
ious situation of many farmers having neither access if they have
a major disaster nor having any catastrophic coverage if, in fact,
the premium levels are so high.
I think we have to be clear about the base and establish the cata-
strophic level. That's where our farmers, in looking at this pro-
posal, came up with this idea of some kind of grain reserve or some
kind of self insurance that maybe would cost less than the pre-
mium payments.
It is something that is just a concept and we need to do a lot of
work on, but I think the sense is there needs to be some different
options, and we don't want to be in a position that if the buy-up
insurance is too expensive it is not going to be accessible, just like
the current system. But, on the other hand, you want to have
something when you've got a very catastrophic situation or we'd be
in very dire straits.
Ms. Danielson. Mr. Chairman, Farmers Union would also sup-
port keeping the money at the catastrophic level. I was also very
interested this morning in the comment made by Mr. Ewing to sug-
gest that perhaps you should allow farmers to choose using a 40
percent deductible and then getting a 40 percent payout instead of
having a 50 percent deductible and getting a 60 percent payout be-
cause many people live in areas where having a 50 percent deduct-
ible means that they will never collect.
Mr. Rahjes. Mr. Chairman, I would respond like this: Let's not
lose sight of the target. The target is to become actuarially sound
250
in this program. The balance is critical. If we use too much in the
catastrophic area, then we wind up not being able in the other area
to keep the balance.
As we look at the disaster program as we have seen it in the
past, and as we look at the number of dollars that have been used,
a critical balance has to be there. There is no question that the cat-
astrophic program is very important to participation, but at the
same time I think that our moneys can be used again by giving the
producer options — and as many options as you possibly can — to
allow them to place that where they want to use it.
Mr. Johnson. I appreciate your insights on this. Obviously, opin-
ions differ. We are sort of talking about an abstract issue here be-
cause we don't have a dollar amount, and obviously we'd have to
have the CBO number crunchers work to see what kind of menu
of options we would have before us. It may be a little bit of a com-
bination of both. It is hard to know, but I appreciate your insights
on that.
I also appreciate your observations on crop quality. I am re-
minded a little bit of the health care debate, however, where there
is no end of things that we would all like to see in the minimum
level of coverage but, again, it is going to be partially budget driv-
en. It is going to come down to how much money we have got to
use.
I think those points are well taken.
Mr. Ewing, any questions or comments?
Mr. Ewing. One comment to Mr. Rahjes. I know that you are
from the district of our ranking minority member, Pat Roberts, and
he asked me to specifically give you his best regards and his apolo-
gies for not being able to be here today for your testimony.
The other point that I would like to make — and it really isn't a
question, just a point. I have raised the issue about changing or
giving options in the catastrophic coverage, whether you have 50
percent coverage with 60 payout or have a 60 percent coverage and
pay out at a lesser level. We are not trying to change the financial
requirements, because we know the USDA has their problems with
that, but they have run some figure which tell us that it may not
be any more expensive to have this option.
I would like all of you to consider that and possibly submit addi-
tional information, if you choose, to the committee indicating how
you feel about that, because I think there are places in the country
that could be very beneficial and could be attractive to more pro-
ducers.
Thank you.
Mr. Johnson. Mr. Sarpalius.
Mr. Sarpalius. Thank you, Mr. Chairman.
I'd like to commend our guests today on the testimony that they
gave.
This is a difficult issue in trying to, as the chairman mentioned,
determine quality of crops. Some of you are talking about the prob-
lems of irrigation farmers versus dry land farmers. You also have
the problem of areas where you do have droughts, and also areas
where you have a lot of hail. A lot of areas of the country don't
have much hail. In my area we do. Some of my farmers think this
251
is a real bargain just from the standpoint of being able to cover
their crops from hail damage.
All of you — not all of you, but most of you talked about the cost
of production versus yields, concern about if we do base it on yields,
how does that affect a producer's average 5delds. That, to me, is a
real dilemma that we have got to try to get a real answer to.
I wanted to ask, first of all, Mr. Hart — in your testimony you
talked about real concern about ASCS being involved in the pro-
gram. You commented about how you felt like they would put this
program kind of at the bottom of the list because of their work
load. I would like for you to elaborate a little more on that. If we
did include ASCS more actively involved in this program, what is
the answer? Are we looking at additional staff, or what?
Mr. Hart. Well, are these people trained, first of all, to basically
sell the farmer? They come in and they sign up for the basic cov-
erage, but are they going to be trained enough to sell them on
maybe they should go talk to the insurance agent across the street
about increasing their coverage? Are they going to want to take the
time to do it?
Sure, maybe it is part of their job definition or job description,
but how much time and effort are they going to put into it? You
are going to have to train the people because they are going to
have a lot of questions. If they are going to try to get the farmer
to buy more coverage from the insurance agent, the farmers are
going to ask that ASCS employee questions. They need to be
trained enough to answer them. This is going to take more time.
One of the things I think is going to be put on the back burner —
I think this program has been tried once before, and I think the
ASCS tried to present an insurance program and it didn't work
very well at all. The people just didn't have any interest and didn't
have any incentive to sell it. It was one of those extra duties that
they had to do, and they did it when they had time and they
thought about it.
Mr. Sarpalius. From an individual who is here speaking for
many banks across the country, do you see this program as one
that would discourage banks from giving loans or encouraging
them for giving loans and protecting their investment?
Mr. Hart. I think it would encourage them, because, like I said
in my statement, we know that these people have the insurance,
have the money in place. Personally, I feel we should go to a cost
basis rather than a production basis so maybe the cash flow — they
know what they have to have to come back to make their cost of
production. We feel more comfortable making the loan, and I think
the farmer should feel more comfortable in purchasing it. He knows
he is going to get so much return. And it might encourage him to
look at the program a little closer.
I'd make one other comment. Chairman Johnson asked about
where we should put the money. I believe it should be left in the
catastrophic program to encourage people to sign up for it. Maybe
in future years you could take the money and wean it out. As more
people get more religion or believe in the program, they are going
to find out the disaster program is a thing in the past. As more
people start utilizing the program, maybe you can change the flow
of money around a little bit. But I think right now we should en-
81-128 0-94-9
252
courage as many people as we can to take the program and sign
up for it.
Mr. Sarpalius. That brings another issue — mandatory coverage.
Some of you testified against that. How else are you going to have
broad participation unless you have mandatory coverage?
Mr. Hart. I think if a person expects something and is using the
various Government programs, he should have some protection.
The Government should have protections. In fact, all the farmers
should protect themselves. We won't lend money to a person to buy
a house unless he has house insurance. We won't lend money to a
person to buy a car unless he has car insurance. If the Federal
Government is going to subsidize these people in some way, the
Government should have some protection and the farmers should
be willing to take that protection.
Mr. Sarpalius. Would Einybody else Uke to comment?
Mr. Mitchell. If I may, I reside just a little ways south of where
you live, and adversity will cause people — and I'm not advocating
adversity, but if you think that you want to be standing up ready
to take out Federal crop insurance, that adversity hits you a year
or two — I know, because I've got friends in the cotton industry that
said it won't work for us. But, unfortunately, a year or two of ad-
verse weather — I'm talking about natural disasters — and they are
ready to take it out.
As I said, I'm not advocating anybody having adverse weather,
but it will put people in line to buy the insurance.
Ms. OZER. We would agree that there needs to be mandatory par-
ticipation. I would just say that in terms of reorganization and the
whole farm services agency, we would hope that there would be the
kind of training that would be clear with folks working with ASCS
that we are talking about the catastrophic portion.
Part of the job may be to be clear that the other pieces are avail-
able, but it won't be the job of the ASCS employee to be promoting.
It would be the job of making sure that people know that it is
available. The crop insurance industry I'm sure will continue to
promote its availability. But adequate training is essential.
Mr. Rahjes. If I may respond with regard to the mandatory ver-
sus voluntary. I spoke of options before and the option level being
there within the program, itself, as presented.
It is pretty obvious that those who may not want to participate
to begin with will be much more apt to want to participate if they
can have the choice of where they want to place their money, even
if it is subsidy, if they can control where the coverage and the em-
phasis on the coverage they want.
There is no question that the catastrophic coverage is very, very
important — nobody is doubting that — ^but give the farmer the op-
tion where he wants to put it.
Mr. Burns. Congressman, I would concur that mandatory par-
ticipation is probably a good concept as a part of this legislation,
partly because it is such a minimum cost when we are talking
about $50 per crop per county with a maximum of $100 per pro-
ducer. As a lender, I don't know of any customers that we have
that would opt out of the program because of the cost.
I think it would tend to encourage broad participation, particu-
larly in buy-up insurance that might come after the basic coverage.
253
which would help make it actuarially sound, which is an important
part of the success of the entire program.
Mr. Sarpalius. My time is out, but there are a lot of gray areas
within this plan, but I really think we are finally, for once, begin-
ning to get more of a consensus than I have ever seen since I have
been on this committee. But there are a lot of unanswered ques-
tions like the buy-up — how much is it going to cost? — and the prob-
lems we discussed on the cost of production versus average jdelds.
I commend the chairman of this committee, and I am convinced
that we will eventually reach a consensus.
I thank each one of you for your testimony.
Mr. Johnson. Just so that there is no confusion, the Chair would
clarify things a bit hopefully.
As the crop insurance reform bill stands, it would not cover hail
loss per se. The hail industry remains in place. But it would cover
other kinds of disasters. The design of the plan is to assure every
farmer of roughly the equivalent of the kind of disaster payment
they now get in years that we do ad hoc disaster bills. That hadn't
been said.
Mr. Peterson.
Mr. Peterson. I came in late and I'll forego any questions. I
might plow some ground that you have already plowed. I got a lot
of my questions asked in Minnesota.
Thank you, Mr. Chairman.
Mr. Johnson. Thank you. And I thank the gentleman from Min-
nesota for coming down from his district to attend the field hearing
we had in Representative Minge's district.
I thank the members of this panel. I think it was a very good
discussion.
I think everybody would just as soon avoid mandatory anything
where possible; however, in this case it is sort of good news/bad
news. The bad news is it is mandatory, the good news is it is free.
There probably will be more contentious issues than that that we
will be dealing with.
Thank you agEiin for your participation in this panel.
The last panel is comprised of: Mr. Michael Connealy, Rural
Community Insurance Services of Anoka, Minnesota; Mr. John H.
Joyce, who is chairman of the American Association of Crop Insur-
ers and president, Rain and Hail Insurance Service, Inc., of West
Des Moines, Iowa, and he is accompanied by Mr. Robert W. Post,
Jr., vice chairman of American Association of Crop Insurers, and
president of Domberger/Berry & Co. of Sioux Falls, South Dakota;
Mr. Robert Parkerson, president of the National Crop Insurance
Services of Overland Park, Kansas; and Mr. Thomas A. Rudisill,
chairman, Crop Insurance Research Bureau, Inc., of Overland
Park, Kzinsas, and manager of crop insurance and administrative
services, North Carolina Farm Bureau Mutual Insurance Company
in Raleigh, North Carolina.
We welcome all of you to this subcommittee. We appreciate your
patience.
Again, we will abide by the 5-minute rule to expedite things a
bit, but feel free to summarize the statement or read the state-
ment— ^however you are most comfortable. But we will try to abide
254
by that time limitation in order to — ^we do have members with air-
plane flights and so on that need to be connected with.
Your entire statements, however, are received for the record and
will be shared with our entire staff and with the members of the
committee.
We will proceed first with Mr. Connealy.
STATEMENT OF MICHAEL CONNEALY ON BEHALF OF RURAL
COMMUNITY INSURANCE SERVICES, INC.
Mr. Connealy. Thank you, Mr. Chairman and members of the
subcommittee.
On behalf of Rural Community Insurance Services, we appreciate
the opportunity to testify before the subcommittee concerning the
Federal Crop Insurance Reform Act of 1994.
Rural Community Insurance Services is a wholly-owned subsidi-
ary of Norwest Corporation, which is a bank holding company.
Norwest is a principal provider of farm operating loans in rural
communities, and also to businesses that support rural commu-
nities, and we consider the crop insurance program to be an essen-
tial part of the fabric of those communities.
It is our hope that a concrete and meaningful crop insurance pro-
gram can be continued by Congress, regardless of the reform act
underway and the budget problems that accompany it.
We do believe that the proposed reform act addresses many of
the concerns that we have regarding the program, and we do thank
you for the invitation and opportunity to share our thoughts.
We have submitted for the written record the 12 issues asked by
the subcommittee. We won't go through those issues one by one,
other than we will comment as regards the mandatory aspect of
the program. We are not totally opposed to is; however, we have
looked at the possibility of a waiver of some nature that could be
considered to help reduce administrative costs, particularly for low
leveraged producers.
We believe that a waiver may be in order in which the producer
forfeits any benefits to any sort of disaster or crop insurance dec-
laration. I guess, to use the words of Congressman Peterson from
Minnesota, they take a blood oath not to accept a disaster pay-
ment.
Our additional comment specific to the reform and also the con-
ventional crop insurance program are that of a lender. Norwest is
unique in the business in that we are the second or third leading
producer of crop insurance premiums in the country, and at the
same time we are the second or third leading production source for
operating loans. Probably across the country and certainly in many
of the States — Minnesota, South Dakota, North Dakota, Nebraska,
Iowa — Norwest is certainly an operating loan leader in those
States, as well as new entries into Indiana, Texas, and New Mex-
ico.
The crop insurance program is viewed as essential to the credit-
worthiness of many farmers, and therefore to those communities.
If the conventional crop insurance program, as we know it today,
were to be eliminated or significantly reduced as a source of collat-
eral, the availability of credit would diminish immediately and the
255
consequences of each storm or drought would be more adversely
felt in those rural communities.
We point out that this is especially true of younger farmers and
high leveraged farmers. We question the role of Government in
worrying about low leveraged farmers or wealth farmers, and
where subsidy dollars are in question we believe that they should
be directed to those that are most in need.
We throw out for statistics: In 1992, we recalculated Norwest's
national loan portfolio and found roughly 775 million dollars' worth
of loans which could be described as land loans or operating loans,
including Farmers Home Administration guaranteed loans. These
loans were limited to those made with the expectations that pro-
ceeds from the sale of crops was going to repay these loans plus
the interest.
Norwest utilizes a risk rating method which scores the loan from
a high of one, which would be best, to a low of seven. Operators
that are rated as a one, a two, or a three would likely not be ad-
versely affected by the loss of a meaningful crop insurance pro-
gram. These loans amounted to $220 million, or roughly 28 percent
of the total.
Loans rated as a five, a six, or a seven would most likely be
dropped from the portfolio. These would include Farmers Home
guaranteed loans, which amounted to $157 million of the total, or
20 percent.
The critical areas — ^those rated as four — many of these also re-
quire crop insurance. They would be aifected by either a higher in-
terest rate, reduced operating line, and in many cases no loan at
all. The impact on these 50-some percent would be significant and
costly to the borrower, as well as to the rural communities in which
they live.
Norwest's main interest in the crop insurance program has al-
ways been as an agricultural lender, and our interest in the reform
is also as a lender. We do additionally have strong interest in the
reform program that benefits the risk bearers and the agents, and
we are also interested in seeing farmers with good loss histories re-
warded by lower premiums and/or higher rates of coverage.
Norwest — and we beUeve other agricultural lenders — already re-
quires crop insurance to the vast majority of those who have the
financial need. If there were a choice in the amount of reform, or
preference would be to keep the conventional program intact — and
also enhanced, since farmers are already participating in that
area— before pushing ahead with a great deal of experimental re-
form.
We are especially cautious of reform aimed at the catastrophic
level of coverage because we see a limited or no amount of addi-
tional operating loans coming into the market supported by 50 per-
cent coverage, 60 percent price selection. That amount of coverage
would not entice us to loan money where we were already question-
ing the loan. It would also not increase the line on those that we
were lending money to. We don't see it as a viable backstop to an
operating loan. , „t i. u i-x j
I think with that we'll conclude our remarks. We have submitted
a written statement for the written record and would be happy to
take questions at the end of the panel discussion.
256
[The prepared statement of Mr. Connealy appears at the conclu-
sion of the hearing.]
Mr. Johnson. Thank you, Mr. Connealy.
We'll move next to Mr. Joyce.
STATEMENT OF JOHN H. JOYCE, CHAIRMAN, AMERICAN ASSO-
CIATION OF CROP INSURERS, ACCOMPANIED BY ROBERT W.
POST, JR., VICE CHAIRMAN
Mr. Joyce. Thank you, Mr. Chairman and members of the sub-
committee for the opportunity to present our views on H.R. 4217,
the Federal Crop Insurance Act of 1994. These summary views are
expressed on behalf of the American Association of Crop Insurers,
a voluntary trade membership association of the private crop insur-
ance industry. Our members represent approximately 60 percent of
the multiple peril premium written in the United States.
We find ourselves presented with perhaps the greatest oppor-
tunity to improve the crop insurance program. At no time have we
seen such a consensus for reform or apparent willingness to merge
the ad hoc disaster payment approach into an improved crop insur-
ance program.
No matter what legislation is passed by Congress, a reformed
crop insurgmce program can only reach its objective if there is a
complete new mindset on all facets of the program on the part of
USDA, FCIC, FSA, the companies, the farmers, and Congress. We
must focus on a greatly simplified program, both for catastrophic
coverage and additional coverages that will be available.
Overall, we believe that at least a one-third reduction in admin-
istrative requirements to the crop insurance program could be
achieved without adversely affecting the program. At the same
time, we are working cooperatively with the administration in sup-
port of this program, we have been presented with a draft reinsur-
ance agreement that adds many new costly programs that we can-
not see any benefit to either the farmer or to anyone in the pro-
gram.
These requirements would amount to almost some additional un-
funded mandates, which I think this committee and Congress has
heard many times before. Unless USDA, FCIC, and the industry
are willing to work on completely reevaluating the need and exist-
ence of all current administrative burdens, neither the current pro-
gram nor a reformed program can be delivered effectively.
The objective of any crop insurance program must be the provi-
sion of incentives and opportunities for farmers that permit them
to adequately and affordably manage their production risk. In
achieving that chief objective, universal availability of a cata-
strophic coverage at little or no charge will not be sufficient.
Only through significant involvement of private industry can we
expect to deliver crop insurance and to add the additional cov-
erages necessary to meet the needs. The administration's reform
proposal deserves positive consideration by budget, appropriations,
and agricultural committees. However, in order to help the pro-
gram achieve its maximum effectiveness we feel that a number of
refinements need to be made. Three specific areas of refinement
are necessary: Program simplification, program delivery, and rea-
sonable return on private capital invested.
257
It is vitally important that whatever simplification measures are
adopted for the catastrophic level should also flow through the rest
of the program. Otherwise, a major disincentive for participation at
higher levels of coverage will be created.
The simplification process would start by requesting this commit-
tee to look at the areas of the buy-up protection from the 50/60 and
the integration from that to whatever the maximum levels of pro-
tection offered are. Maybe one suggestion might be to buy up to —
the first limited buy-up would be to a 50/100. That might be one.
We also believe very strongly that this catastrophic protection
safety net cannot have any holes in it such as could be created by
the nonstandard classification system.
One of the most frequent comments about the crop insurance
program is that it doesn't provide enough coverage. While we have
heard much discussion and the legislation would allow for many
higher levels of coverage, we would also suggest that there are
other options such as disappearing deductibles that could be offered
by the program at a much reduced price.
Given the proper incentives, reasonable opportunities for return
on capital throughout the program, and appropriate Grovemment
backing, USDA and farmers would be amazed at the explosion of
crop insurance products that could be developed by the private sec-
tor to fill the holes in these programs. We applaud the FCIC for
approving one of these programs to date and look forward to more.
As we contemplate adding approximately 1.4 million participants
to the program, the streamlining and reduction of administrative
burden for FCIC, the companies, the agents, and particularly the
farmer participants becomes even more important. We believe
there should be — again, we say there could be a one-third reduction
of administrative requirements without adversely affecting the pro-
gram.
In the are of program delivery, we are in strong support of the
administration's proposed reliance on the private sector. This maxi-
mizes the impact of limited Federal dollars and recognizes the pref-
erences and convenience of farmers in obtaining their crop insur-
ance coverage at the same place as they obtain the rest of their
farm insurance.
We also believe that the catastrophic protection alone is not suffi-
cient to save the farm for most borrowers when disaster strikes.
We strongly believe that professional counselling to quantify risks
and match them with the right insurance coverage is indispensable
for this program to succeed.
At a minimum, we strongly suggest that farmers' risk manage-
ment needs could best be met if farmers are required to visit a pri-
vate agent prior to being able to obtain a catastrophic policy at the
USDA office. , -
The last comment would be relative to the cost of mvolvement oj
a duplicate delivery system in addition to crop insurance. We would
ask the committee to strongly consider that option only on an as-
needed basis and allow the funding that might be used in this area
to be added to program benefits.
We also believe that the necessity for administrative expense re-
imbursement to handle this program is critical. While many of the
suggestions as to the change in coverage attachment points, such
258
as one that was raised here this morning several times of going to
60/40 rather than 50/60 — I think we have to balance out the need
for coverage and the need for options with the simplicity in the
costing necessary so that every farmer can say that they under-
stand the program. This goes back to the complexity issue.
There is also strong justification for some type of expense reim-
bursement supplements in years like 1995 if this program is passed
when the industry tries to undertake a significant retooling of all
the operations to accommodate a reform program.
We would also suggest to this committee that FCIC and Grovern-
ment remember that you have some strong private partners more
than willing to go to bat; however, we must have a reasonable re-
turn on capital to continue to expand these programs.
In conclusion, we have a unique opportunity this year. We be-
lieve the administration has set before Congress a framework for
reform that will work if refined and implemented in a manner
which capitalizes on the existing public/private partnership. We
cannot emphasize strongly enough that the reform program will
achieve its objectives if everyone involved approaches with a new
mindset.
Private sector will deliver day in and day out, and we look for-
ward to working with you, Mr. Chairman, and this committee and
USDA for whatever changes may be necessary
Thank you.
[The prepared statement of Mr. Joyce appears at the conclusion
of the hearing.]
Mr. Johnson. Thank you, Mr. Joyce.
Mr. Parkerson.
STATEMENT OF ROBERT PARKERSON, PRESIDENT, NATIONAL
CROP INSURANCE SERVICES
Mr. Parkerson. Thank you, Mr. Chairman, for our opportunity
to appear here today on behalf of NCIS, which is National Crop In-
surance Services.
NCIS has been serving the crop insurance industry in one form
or another since 1915. Our organization continually evolves around
the needs of the crop insurers. We were organized for primarily
three reasons: One, to gather and analyze crop insurance statistics
so that we could create the appropriate premium, and that could
be developed to be delivered to the consumer; also, to develop a
standard policy so that both the consumer and the agent under-
stand the product that is being sold; and to deliver loss of judgment
procedures that are acceptable to all combined.
I'll make this brief, since I see the writing on the wall — or the
old clock. And we still have other people to hear from.
While we may not all agree on every detail of the proposal, the
industry will work to improve the package, keeping an eye on the
actuarial soundness and the underwriting and the delivery system.
We believe that most all segments — ^the producers, the commod-
ity groups, and the insurance industry — stand strongly behind this
action.
We feel that the administration's approach reflects sound budget
discipline for all, to include the taxpayer, along with sound risk
management for the American farmer.
259
The industry has made a great deal of commitment to this pro-
gram over the last 14 years and would like to remain, I believe, a
key part of this program. However, should the social aspects over-
take sound business practice and sound insurance principles, then
I think the industry would have to look at some of this proposal.
We have submitted a statement in writing, Mr. Chairman, and
I will leave it at that.
[The prepared statement of Mr. Parkerson appears at the conclu-
sion of the hearing.]
Mr. Johnson. 'Riank you, Mr. Parkerson.
Mr. Rudisill.
STATEMENT OF THOMAS A. RUDISILL, CHAIRMAN, CROP
INSURANCE RESEARCH BUREAU, INC.
Mr. Rudisill. Thank you, Mr. Chairman.
I come as chairman of the Crop Insurance Research Bureau,
whose members vary from large to small companies, some MPCI
writers, and some who are not, but write private crop insurance
coverages and are very interested in the program.
As our written testimony indicates, the reform program is a con-
cept, and we think it meets most needs for disaster protection, com-
bined with risk management for the farmer.
To function satisfactorily, some fine tuning will be necessary and
the areas of this need are currently being addressed by FCIC and
industry people, along with others, and we feel like they are work-
ing diligently to that end.
I'll mention just a very few of the concerns that we have that
were not included in my written testimony.
One, the bill may be a little bit specific in some areas where it
could be more effectively left to some regulatory handling and the
flexibility that would go with that. One example would be the APH
formula. Perhaps that would be best left out of the bill and handled
administratively.
We feel competition between companies should be based on serv-
ice rather than on price. The provision allowing for certain compa-
nies to save on administrative costs and pass that on in the form
of price competition may be counter-productive in two ways: Large
companies with an economy of scale might be able to use this to
take us toward more monopolistic production of this business at a
time when we have already reduced from some 50 companies writ-
ing this business down to 15 or less. We feel basically that competi-
tion— a more advisable manner would be to establish a reasonable
amount of allowance for administrative cost to provide prompt, ac-
curate, efficient service and let the service be the competition.
We feel that naming of specific perils should remain in the act,
as opposed to the current provision which would not allow the
farmer to know exactly what he was insuring against. We feel
named and specific perils are important.
We also have some concerns about the 85 percent level of cov-
erage which others favor. The reason for this is, actuarial sound-
ness being one of the primary objectives of the program, at this
time the 50 percent level of coverage is producing a 100 percent
loss ratio, the 65 percent considerably higher, and the 75 percent
level is a 175 percent loss ratio. So to move on up to an 85 or 95
260
percent level would exacerbate the problem with actuarial sound-
ness.
In conclusion, we think some adjustments could be made, are
necessary, but we favor the program as presented and we com-
pliment each of the other people and this committee especially for
the opportunity to state our views.
[The prepared statement of Mr. Rudisill appears at the conclu-
sion of the hearing.]
Mr. Johnson. Thank you. I appreciate your observations about
actuarial soundness. Obviously, there would be some subsidy re-
quired. We want to encourage that buy-up to the degree that we
can, but I think it is a good point that left strictly to premium lev-
els, it could create an enormous premium burden if there is not
some fairly substantial subsidy for that buy-up encouragement.
Let me ask you just briefly here — and I apologize. We've got a
vote pending, and I'm going to have to excuse myself quickly, and
I hate to have you stay here just for a few more questions.
The purpose of the administration is that we need a dual deliv-
ery system because there simply are not enough agents across the
country — at least in some portions of the country — to handle a
sign-up that currently is around 30 percent and they anticipate
being around 80 percent.
Do you basically agree with that — that there really is no way
around, at least initially, a dual delivery system, at least until the
private insurance system matures in some regions of the country?
And if there is a dual delivery system, what level of training do you
think realistically is going to be important for ASCS personnel?
Anybody on the panel may take a shot at that.
Mr. CONNEALY. As far as the administration's position that
agents don't exist in certain areas, we are not aware of where those
areas are. That was the dialog we had with them. They wanted to
insure that everybody was visited with about the program. We
don't know of a specific area, that local agents couldn't be appointed
and trained if there was a monetary reason for them to be.
We are a national writer. In 40-some States we have agents ap-
pointed and servicing clients. We think it was more of a cost basis
that for the free level of coverage the agent wouldn't be interested
in providing the administrative work, and that the proposed FSA
would be a backstop.
Our estimate on the cost of that is that it is considerably more
than the value that is going to be received by the Grovemment for
appointing those FSA's.
We had a pilot project, I believe, in 1990 on training ASCS of-
fices, and several million dollars were spent training ASCS people
to sell the policies, and I believe they sold fewer than a handful.
So it is questionable.
By the same token, the way the administration's proposal reim-
burses expenses at the catastrophic level, by and large the private
sector, including the agent force, would not support it because
there isn't any money to pay their cost.
Mr. Johnson. Any very brief follow-up on that?
Mr. Joyce. I would concur with Mr. Connealy and would address
the issue of training. It would be our suggestion — and I believe you
would find from the Big I and the PIA agent associations and many
261
other professional associations that if you are going to keep the
program on an equal keel where it is understandable, people know
what they are buying, the service to be expected, that the same li-
censing-training requirements that go into allowing an agent, both
at the State level to be certified to sell and to meet the FCIC re-
quirements which are in addition to their State licensing, would be
absolutely mandatory, along with equal administration of the pro-
gram under all terms simply to keep it from being confusing.
Mr. Post. Just one more thing. Congressman, on the availability.
I do not believe the farmer has any difficulty, even in the far
reaches of this country, in finding an insurance agent for his farm
vehicles and his equipment, and I think the same thing will occur
on crop insurance.
Mr. Johnson. I want to thank the members of the panel for your
contributions here. The full written statements are received. I
think it is very helpful.
I have a vote on the crime bill. If I am not over there in 3 min-
utes I will be recorded as being in favor of crack cocaine, and so
I am going to have to excuse myself to record that vote.
Thank you very much for your attendance here.
With that, this subcommittee is adjourned.
[Whereupon, at 12:53 p.m., the subcommittee was adjourned, to
reconvene at the call of the Chair.]
[Material submitted for inclusion in the record follows:]
262
National Association of State Departments of Agriculture
1 156 ISthStheet. N.w. • Suite 1020 • Washington. DC 20005
TELEPHONE: 202/296-9630 • Fax: 202/296-96S6
OSmON STATEMENT
Testimony of
Bob Odom, Commissioner
Louisiana Department of Agricnltnre and Forestry
on bdialf of the
Natioud Association of State Departments of Agriculture
before the
House Agriculture Subcommittee on
Environment, Credit and Rural Development
U^. House of Representatives
April 21, 1994
re: Federal Crop Insurance Reform Act of 1994
Good morning Mr. Chairman, memben of the Subcommittee. I am Bob Odom,
Commissioner of the Lomsiana Depaitment of Agriculture and Forestry. I also serve as
President of the National Association of State Departments of Agriculture (NASDA). I
appreciate the opportunity to appear before you today and to offer my comments on the
Administration's proposed "Federal Crop Insurance Reform Act of 1994." My comments not
only reflect my own position but also the position taken by NASDA at their annual meeting held
Sqrtembcr 13, 1993, in Waterville Valley, New Hampshire.
NASDA is the nonprofit association of public officials representing the Commissioners,
Secretaries and Directors of Agriculture in the fifty states and the territories of American Samoa,
Guam, Puerto Rico, and the Virgin Islands.
Hrst let me say that I support the efforts of the Administradon to reform the federal crop
insurance and ad hoc disaster programs and have spoken to the Administradon on numerous
occasions about my position on die need for change from what we have to offer to ^trmers
today. The proposal before you addresses those concerns.
Commercial, mainstream farmers in my state and odier states, for the most part, are not
supporters of the current federal crop insurance program and have signalled a desire for
fundamental reform of the program. The current program does not meet their needs and the
premiums are excessive for the coverage provided. The current program provides opportunities
for widely known abuses by fermen who, year after year, form just to collect insurance. Many
farmers in my state have been indicted and convicted for various abuses under the current
program and investigations are continuing. In fact, the loss ratio in Louisiana is higher than the
nasda is a nonfrofit association of pubuc officials representtng the commissioners.
Secreuries and Directors of agriculture in the fifty siates and four terrtpories.
263
national average for the last ten years. We need a crop insurance program designed for the
mainstream, low risk commercial farmer who is interested in financial protection in case of a
loss due to drought, flood or natural disaster, and we need a program the farmer can afford.
The proposed "Federal Crop Insurance Reform Act of 1994" provides the framework to meet
this need and also provides the positive changes needed if the federal crop insurance program
is to survive.
Additionally, the proposal eliminates the uncertainty of farmers receiving assistance from
ad hoc disaster programs by providing catastrophic risk protection as part of the crop insurance
program. Providing disaster assistance on an ad hoc basis, as we do today, tends to discourage
participation in the crop insurance program. The possibility that a farmer will receive some type
of assistance, even if he does nothing to protect himself from loss, sends a very wrong signal
that crop insurance is an uimecessary expense. It is widely accepted that we cannot continue to
have both programs because of cost and because of inequities in the assistance provided through
the current disaster program. Farmers prefer a comprehensive crop insurance program that will
help meet their financial security needs on an individual basis rather than the uncertainty of ad
hoc disaster programs dependent upon wide area or multi-state disasters and congressional
appropriation of funds. I support this part of the proposal which provides a permanent basic
level of support at nominal cost to the farmer, yet costs no more than has been the average cost
to the taxpayer over the last ten years or so.
Specifically, as it relates to the proposal, I support the following concepts that have been
included:
1. A comprehensive federal crop insurance program must meet the needs of
mainstream, low risk producers by offering them financial security in case of
drought, flood or natural disaster and must have incentives to attract these
producers into the program to ensure widespread participation. For example,
premium discounts should be offered to those farmers with good experience.
Conversely, farmers who consistently have losses should be placed in a "High
Risk Pool" and taken out of the actuarial data base used to calculate premiums.
Additionally, significant premium discounts for higher levels of coverage are
critical in order to attract participation at those higher, "buy up" levels of
coverage which are needed to make the program more fiscally sound. It is my
understanding that these incentives will be included in this program.
2. Insurance coverage should be based on the "Actual Production History" of
individual farmers based on proven yields, proven through the Farm Service
Centers, rather than to the insurance company through its private agents. This
will reduce any attempt to assign production history to a farm on which the
production did not occur.
3. Farmers should have the option of buying the level of coverage they determine
best meets their needs on an individual basis. Under the proposal, farmers may
purchase additional insurance coverage providing higher yield or price protection
levels above the basic catastrophic risk protection, for an additional premium.
The FCIC has stated that farmers will have more flexibility on yield and price
264
elections and unit structure than is currently available, with the assurance that the
program will be more farmer friendly, with new products and flexibility.
Incentives are provided through premium discounts at the higher levels to
encourage greater participation, which, I feel, is extremely important to the
success of the program. Premiums for the "buy up" coverages must be
reasonable and affordable for the risk involved in order to enlist the low risk
farmers into the program.
4. Farmer records should be identified by Farm Serial Number and Social Security
Number.
5. Ad hoc disaster assistance for all crops eligible for crop insurance should be
eliminated. I support the catastrophic risk protection program offered in the
proposal at 50 percent loss in yield, indenmified at 60 percent of the expected
market price. I do not feel that a lower base level of coverage will meet the need
of farmers who choose not to purchase buy-up levels of coverage. A base level
of coverage that is too low will not provide the fanner with sufficient financial
coverage to see him through a crop loss and will only encourage calls for ad hoc
disaster assistance to make up the difference. Then we'll find ourselves right
back where we are today.
6. I also support the noninsured assistance program that will cover those crops for
which crop insurance currently is not offered. Replacing the ad hoc disaster
program, with all its uncertainties, with a catastrophic risk protection program
and a noninsured assistance program with certainty of protection is critical to this
proposal. When both programs are offered or available to fanners who produce
crops eligible for crop insurance, i.e., federal crop insurance and ad hoc disaster,
a conflict exists which creates uncertainty and provides a disincentive for low risk
producers to participate in the crop insurance program, thereby weakening the
whole program. This lack of participation creates a higher loss ratio to premiums
earned, creating the need to increase rates which further aggravates the
participation problem. Combining these two programs into one eliminates the
uncertainty and meets the need of farmers, particularly in their financial planning
and banking relationships.
Mr. Chairman, thank you for the opportunity to participate in this very important hearing
today and allowing me to express NASDA's support for the Administration's proposed "Federal
Crop Insurance Reform Act of 1994." The current program is not serving the needs of
mainstream, commercial farmers and a total reforming of the program is needed. Thank you.
265
LARRY DIEDRICH, PRESIDENT OF THE
AMERICAN SOYBEAN ASSOCIATION
COMMENTS BEFORE THE HOUSE AGRICULTURE
SUBCOMMITTEE ON ENVIRONMENT, CREDIT AND RURAL DEVELOPMENT
APRIL 21, 1994
Good Morning. I am Larry Diedrich, a soybean, corn and hog producer
from Elkton, South Dakota, and currently serve as President of the
American Soybean Association. ASA appreciates the opportunity to
comment today on the federal crop insurance program and to propose
improvements in the program.
Soybean producers traditionally have not participated in the
current crop insurance program. Many have found it not worth
purchasing. There has also been a history of abuse in some of our
producing areas, causing "good" farmers to avoid participation on
the basis that the "bad apples" have spoiled the program for
everyone. However, record losses resulting from drastic weather
patterns coupled with improvements in the program in recent years
changed the attitude of soybean producers. Many are reconsidering
the option of crop insurance.
My brother and I are among these new participants. For the first
time, we are insuring our soybeans and corn. We have found several
improvements in the program, including late and prevented planting
coverage for soybeans. And with our good records we are able to
utilize APH for yields.
However, I would recommend changing the current policy for drilled
soybeans. It currently costs 25% more to cover drilled soybeans as
opposed to conventional row-planted soybeans, even though drilled
soybeans produce higher yields. Many producers in our region plant
with a drill because of our no-till practice. We should not be
penalized for updating and improving our efficiency.
Soybean producers as well as other farmers need risk management
tools to provide income security and stability. The Federal crop
insurance program could and should be a useful means for doing just
that. The Administration's reform proposal is a step in the right
direction. Producers do need protection from catastrophic
disasters. Under current budget constraints, ad hoc federal
disaster assistance will become harder and harder to count on.
The Administration's proposal guarantees basic coverage for
catastrophic disasters to all producers at a minimum cost. It also
gives the farmer's lenders assurance of guaranteed protection
against extreme disasters. Currently, lending institutions
do not consider the possibility of federal disaster assistance as
true security for their investment.
The Administration's catastrophic plan, in itself, does not offer
complete risk managment. We must improve the current crop
266
-2-
insurance program to accompli-sh this. It is my understanding the
Administration's proposal would continue to offer the options of
additional coverage at the 65 percent and 75 percent levels at
slightly below current cost. Many of our members would favor
adding an option of 85 percent coverage. In addition, all agree
that yields should be based on actual production history.
Test counties in 24 soybean producing states now offer the Group
Risk Plan. Although participation has not been great, and it may
be too early to measure its success, most soybean producers are
skeptical of the "one fits all" approach of this plan. For
example, one farmer or several in one part of a large county may
suffer huge losses because of a hail storm or flooding. The rest
of the county may not have the same conditions and the county would
not qualify for crop insurance pay-out. In this instance, single
producers or small groups of producers could be left without
coverage even though their individual losses were great.
Views and concerns regarding other provisions in the
Administration's reform package vary by region and even by
producer. However, I would like to mention three of special
significance to our membership:
Delivery; Opinions differ on the preferred choice of delivery for
crop insurance. Mr. Chairman, as you probably know, most producers
in my region would prefer that private companies handle crop
insurance. However, in the South where there have been problems
with some agents or companies, many producers feel ASCS or the
proposed Farm Service Agency should manage all insurance. My hope
would be that, regardless of who offers the insurance, it be
consistent and that handlers be responsible and accountable for
policies.
Linkage to Farm Programs; Mr. Chairman, I am certain you and most
of the Committee would agree that farmers are independent. We just
do not like mandates, of any kind. Although, the proposed fee for
catastrophic coverage is nominal for most producers, we fear
additional requirements could be added down the road. For
instance, would a cap be set by law on this payment or could it
increase if costs are not controlled? Would it set a precedent for
additional requirements? We already have linkage with our
conservation compliance plans, and we are hearing of other possible
requirements under environmental proposals. Are we making
participation in farm programs less and less attractive? These
questions need to be asked, and answered.
Price Election; Many of our members, particularly in the South,
are not satisfied with the current pricing formula system. They
favor a price selection more reflective of local prices. For
example, if the highest price selection is $6.00 per bushel for
soybeans, that is a fair price for me in South Dakota. However,
$6.00 is not considered fair by my friends in Louisiana. They need
267
-3-
$6.50 to cover their higher input costs. The price election
offered should meet the needs of different producing areas.
Mr. Chairman, I appreciate the opportunity to be here today and to
express some of the views and concerns of U.S. soybean producers
regarding the Federal crop insurance program. I do not envy the
Committee's challenge as you tackle the growing need to improve our
system and wean producers from ad hoc disaster assistance. I would
be happy to provide additional information on other aspects of the
proposal or the current crop insurance program.
Thank you very much.
f .
?' ** ' ' ."' ■'
268
STATEMENT OF THE AMERICAN BANKERS ASSOCIATION
Mr. Chairman and Members of the Subcommittee, I am pleased to be here on
behalf of the American Bankers Association (ABA) to participate in this hearing
regarding HR 4217, the "Federal Crop Insurance Reform Act of 1994." My name is Phil
Burns, president of the Farmers and Merchants National Bank in West Point, Nebraska
located about 50 miles northwest of Omaha. I currently serve on the American Bankers
Association's Agricultural Bankers Executive Committee. My bank has S65 million in
assets and a $50 million loan portfolio, of which $35 million is in agricultural loans. Crops
in our service area include com, beans and alfalfa. Like many other banks across the
nation, we own a full-service insurance agency, which we bought several years ago.
However, we have been selling crop insurance for at least 10 years, even before the
insurance agency was purchased.
As many of you know, the American Bankers Association is the national trade and
professional association for America's commercial banks, from the smallest to the largest.
ABA's members represent about 90 percent of the industry's total assets. Approximately
94 percent of ABA's members are community banks with assets of less than $500 million.
Over half of ABA's 12,000 members have important agricultural concerns. It is good
being here today to make a brief statement and answer any questions you may have.
To begin, the banking industry would like to commend Chairman Johnson,
Congressman Combest, and the entire Subcommittee for looking at ways in which we can
effectively address crop insurance and disaster assistance issues. Further, America's small
and large banks support adequately-funded crop insurance reform at the Federal level.
Your interest in improving the crop insurance program by providing reliable catastrophic
coverage on the basis of individual farmers' needs and reducing unreliable ad hoc
agricultural disaster programs is a good move for our nation's farmers and the rural
communities about which we are all concerned. An emphasis on crop insurance sales
through the private sector wherever possible is also a step in the right direction.
269
Statement of the Ameiican Bankers Association (page 2)
HR 4217, "the Federal Crop Insurance Reform Act of 1994"
Thursday, April 21, 1994
Banks across the country are primarily concerned about the availability of crop
insurance which can be consistently and efficiently used as collateral. We know that
dependable crop insurance can, and frequently does, mean the difference in whether
banks are able to approve operating loans and other types of credit for farmers
struggling to stay ahead in high-risk situations and in challenging agricultural markets.
Like many other banks, our bank is an active participant in Farmers Home
Administration (FmHA) guaranteed lending programs. FmHA requires the purchase of
crop insurance before loans can be processed. We join other banks across the country in
looking for ways to help beginning farmers and ranchers in particular who are often high-
risk borrowers. Adequate crop insurance coverage helps us to continue serving these and
other customers.
Mr. Chairman and members of this Subcommittee, commercial banks join you in
looking for ways in which cost-effective and reliable types of crop insurance can be made
available at reasonable prices. Crop insurance is one of the government-assisted
programs utilized by commercial banks to effectively serve rural economies. The banking
industry is interested in working with you to consider reasonable ways in which we can
continue meeting the various needs of all rural communities.
Mr. Chairman, in closing, America's bankers are interested in working with you
and members of this Subcommittee to advance an adequately-funded and reliable crop
insurance program which can meet the various needs of the farmers we serve. Thank
you for this opportunity to express the concerns of small and large banks across our
nation. Attached to my printed statement are specific responses to your questions
regarding HR 4217.
(Attachment follows:)
270
Statement of the American Bankers Association (page 3)
Thursday, April 21, 1994
Responses to specific questions concerning
HR 4217, "the Federal Crop Insurance Reform Act of 1994"
!
o TTie American Bankers Association supports the availability of reliable crop j
insurance. Crop insurance can make a positive difference in whether marginal borrowers
can get operating loans; <
o Regarding the $50 catastrophic coverage processing fee not to exceed $100 p)cr \
grower per county, most bankers believe it would be affordable to all producers.
Simplification is the key;
o It is a good idea to require producers to obtain at least catastrophic coverage in ^
order to be eligible to participate in price support and loan programs. This provision is
necessary if Congress has any hof)e of moving away from ad hoc disaster payments.
o The banking industry commends your emphasis on developing a dual delivery j
system in which catastrophic coverage can be widely available from both the private
sector and USDA service centers. Your emphasis on the availability of additional \
coverage being available only through the private sector is a step in the right direction;
o The members of ABA believe that utilization of actual production history over
multiple years to establish necessary coverage level(s) is the correct approach; ^
o Producers should be required to insure all cropland; I
o Some farmers, especially those who are just getting started, may be highly
leveraged. We encourage you to keep in mind that more than 75 percent coverage may
be necessary in some cases. Producers should have opportunities to purchase ,
supplemental products; i
o Farmers who grow non-insurable crops need special coverage prior to planting
season; j
o ABA encourages the FCIC to make broader use of their authority to back private ,
sector initiatives like "market value protection," which ties insurance to market prices and
provides more protection to growers who pre-sell or hedge crops during growing seasons. 1
271
REVISED COPY _ _^. .
Testimony of
James F. Hart
Miller, South Dakota
on behalf of the
Independent Bankers Association of America (EBAA)
before the
House Agriculture Committee
Subcommittee on Environment, Credit and Rural Development
on
H.R. 4217
The Federal Crop Insurance Reform Act of 1994
Washington, D.C.
AprU 21, 1994
Mr. Chairman, Members of the Subcommittee, my name is James F. Hart, and I am
president and CEO of the Hand County State Bank in Miller, South, Dakota. I'm pleased to
be here today to testify on the Administration's crop insurance reform proposal on behalf of
the Independent Bankers Association of America (IBAA). I serve on IBAA's Agriculture-
Rural America Committee, which develops policy for IBAA's 6,000 member bankers on
agriculture, trade, the environment, and rural development issues. IBAA is the only national
trade association that exclusively represents the views of our nation's community bankers.
Mr. Chairman, let me begin my testimony today by congratulating you on your
selection as chairman of the Subcommittee on Environment, Credit and Rural Development.
All three of these subject areas — the environment, credit and rural development ~ are
critical to the future of our state of South Dakota. So from a personal and parochial
standpoint, "we've got you right where we want you."
Let me also thank you, Mr. Chairman, for making crop insurance reform one of your
earliest priorities on this subcommittee, and for scheduling this hearing today. Federal crop
insurance has been the source of considerable controversy ever since the Crop Insurance
Reform Act of 1980 broadened the scope of the program in an effort to achieve universal
coverage and break the malignant cycle of annual disaster programs. So the task of
reforming the program is certainly not an easy one, and we are grateful to you for taking the
initiative to move the process forward.
272
IBAA Supports Crop Insurance Reform
Mr. Chairman, 45 percent of IBAA's member bankers are agricultural bankers
according to the USD A definition. Equally important, a full 75 percent of IBAA banks are
located in towns of 10,000 people or less. So it would not be much of an exaggeration to
say that the great majority of IBAA bankers are agriculture-dependent. That is why we have
taken such an interest in the Administration's crop insurance reform proposal, and that is
why IBAA has worked with the Administration and the crop insurance industry to come up
with a program that we think will work.
In February, delegates to IBAA's national convention adopted the following
resolution:
Crop Insurance and Disaster Relief. Many IBAA agricultural bankers rely on
federally-subsidized Multiple-Peril Crop Insurance (MPCI) to protect crops used as
collateral on operating loans. Many farmers rely on crop insurance to help reduce
risk and backstop marketing programs, such as forward contracting and other price
discovery mechanisms. However, it has become apparent that we can no longer
afford to support a subsidized crop insurance program and provide annual ad-hoc
disaster payments as well.
IBAA supports reform efforts aimed at reducing reliance on disaster aid by providing
all growers of program crops with a basic level of crop insurance coverage. To
facilitate "buying-up ' with add-on MPCI policies, IBAA supports maintaining the
private sector delivery system in lieu of converting to a government sales force. And
we believe consideration should be given to modifying the program from a "yield
protection program " to an "income protection program " to make it more predictable
in managing cashflow and easier for farmers to understand.
Bankers Use Crop Insurance
As the resolution states, crop insurance is important to agricultural bankers because
many of us use it to protect collateral on operating loans. To put it very simply, we would
rather lend on a contract than a promise. A crop insurance policy is an effective and reliable
backstop for ag loans; ad hoc disaster payments, which may or may not be there when
needed, is not.
Several years ago, IBAA conducted a study of leadership bankers to determine
whether or not they used crop insurance. While the survey was admittedly scientifically
flawed, the results were nonetheless revealing. More than seventy percent of the bankers
surveyed either required or strongly encouraged their farm loan borrowers to carry crop
insurance. So this program is nearly as important to lenders as it is to farmers and ranchers.
Proposal Fundamentally Sound
Is the reform proposal that is on the table perfect? Not by any means. Does IBAA
273
support it? One-hundred percent!
Our position on the Administration's crop insurance reform proposal is analogous to
our position on their proposed CRA regulations. The new CRA regulations are far from
perfect. But the fundamental concept embodied in the regulations, to streamline the
examination process for community banks by creating a two-tiered system, is so sound, that
it should not jeopardized by quibbling about details.
Similarly, the underlying concept in the Administration's crop insurance reform
proposal, that is to combine disaster relief and crop insurance to form one catastrophic
protection program for all farmers, is such an improvement over the existing system that it
should not be jeopardized by our desire to make it perfect.
Farm Subsidies In Decline
Equally important, Mr. Chairman, is the fact that in all likelihood, direct government
farm subsidies will disappear or decline substantially. At last year's Agricultural Outlook
Conference, Secretary of Agriculture Mike Espy said:
*/ have seen the handwriting on (he wall. U.S. budget support to agriculture
will coniinue to decline. We can scream, we can curse, we can lambaste, and
sometimes even cattse some delays in the inevitable. But the fact is that U.S.
budget support for agriculture will continue to decline. '
This was never more evident than during last year's appropriations process when two
very popular and traditional farm programs ~ the wool and mohair program, and the honey
program ~ were abolished. What is next? Tobacco, peanuts, cotton, rice? It's anybody's
guess.
With this prospect being laid directly on the table, it becomes even more imperative
for fanners and ranchers to begin to manage their farm risk more prudently. Uncle Sam
won't be there forever. And the Administration's crop insurance reform proposal is an idea
whose time has come, and which has come at the right time. America's producers m.ust take
hold of their own destiny, and this proposal will give them that opportunity.
Having said that, Mr. Chairman, let me now address several features of the bill in
more detail, and make some recommendations for making the package an even more
effective risk management program for our nation's agricultural community.
Repeal Disaster Authority
1. First of all, the authority for ad hoc disaster programs must be repealed.
Without this, no reform package will work. It's that simple.
Contrary to popular belief, the Crop Insurance Reform Act of 1980 created a
reasonable framework for a nationwide risk management program that would provide
274
virtually universal protection at affordable prices. But the program never reached its full
potential. Participation never achieved expected penetration, prices never came down to
affordable levels, and the goal of actuarial soundness was a pipe dream. Why? One
fundamental reason called ad hoc disaster payments. So long as farmers and ranchers knew
that if a natural disaster struck, they could reasonably count on the Federal Government to
bail them out, there was no reason for them to lay out their hard earned cash to purchase
crop insurance. And to be very honest, who could blame them.
The fact of the matter is that over the last decade, there were two things you could
count on every year. One, there would be a natural disaster somewhere in the country; and
two. Congress would pass an ad hoc disaster bill. And ad hoc disaster assistance has proven
to be the costliest and least efficient way to keep farmers in business.
Last year alone, America's farmers and ranchers received more than $2 billion in
emergency disaster assistance. Now you might say that with the Midwest floods, the
Southeast droughts, the California fires, etc., that was an aberration. And you would be
right. But over the last ten years, ad hoc disaster payments have averaged something like
$1.6 billion a year. That's nearly double what the government spent on crop insurance.
And that's not an aberration. And it did nothing to help build farmer discipline for risk
aversion in their farm plans.
Mr. Chairman, if Congress passes every word of this crop insurance reform proposal,
but fails to terminate the authority for ad hoc disaster programs, the reform proposal will not
work. There will be no incentive for farmers to self-protect, and the vicious cycle of annual
ad hoc relief programs will continue.
Cross Compliance Also Key
2. Similarly, we strongly support the cross-compliance feature of the proposal,
and feel that this, too, is a key to the program's success.
You cannot go out and buy a house today without first buying fire insurance. You
can't drive a car off the lot until you have auto insurance. And the reason is simple. The
mortgage banker and the auto dealer want to protect their investment.
The same should hold true for the Federal Government. If the Federal Government
invests in a farmer or rancher through subsidized loans, deficiency payments, CRP, or
anything else, the Government has a right to protect that investment by requiring the
producer to carry crop insurance. And protecting that investment is not only good public
policy from a taxpayer's standpoint, but it will provide program beneficiaries the assurance
that should they be victimized by a natural disaster, they will not have to spend the rest of
their lives paying off Uncle Sam, as is the case today with many farmers inundated with
defaulted FmHA Emergency Disaster Loans.
Price Competition is Good
275
3. We support the provision that allows more efficient insurance companies to
reduce rates charged to farmers and ranchers. As part of the private sector, we bankers feel
that all things being equal, the private sector can do things more efficiently and cost
effectively than the government. And we feel that this program, too, can benefit by
abolishing the master marketer concept and relying totally on the private sector.
And we believe that producers should reap some of the benefits of more efficient and
cost effective programs. Price competition is fundamental to the free market system. It has
worked in every sector of our economy, and has assured Americans of the highest quality
products and services at the lowest possible prices. We believe price competition would
have the same effect on crop insurance.
Dual Delivery System is CoDcem
4. While we support the feature of the bill that requires farmers to purchase
higher coverage policies exclusively from private agents, we have some concerns about
delivering the basic catastrophic coverage programs through Federal offices.
Many of us remember when crop insurance was sold in county ASCS offices, and
many of us also remember that the only time they performed that function with any
enthusiasm was when their normal workload requirements were completed. The fact of the
matter is that ASCS employees have neither the expertise nor the inclination to deliver this
product in an effective, conscientious manner. And the result of that attitude will be, in my
opinion, that many producers will not be given adequate guidance on other buy-up
opportunities that might better suit their individual requirements.
The apparent solution to this dilemma would be to deliver the catastrophic coverage
exclusively through trained and qualified private insurance agents. There may be other ways
to address this problem as well. But the important point is that the basic package may not be
the appropriate package for most fanners. Indeed, the 50/60 coverage level won't keep
many farmers in business unless they have other resources they can fall back on. So it is
critically important to assure that every farmer and rancher have the opportunity to consider
buy-up policies in an informed manner. And maintaining a dual delivery system may not
achieve that objective.
Make Crop Insurance Funds Mandatory
5. We support moving crop insurance from the discretionary to the mandatory
account to make it less vuberable to political manipulation. Under current law, the crop
insurance program is a hostage of the appropriations process. So long as the leadership of
the appropriations committees in Congress supports crop insurance, it will be adequately
funded. However, if that were not the case, the program could be terminally crippled by
withholding adequate funding.
If, indeed, crop insurance is going to be the primary risk protection program available
to farmers and ranchers, then it must have the full faith and backing of the Federal
276
Government. And moving crop insurance to the mandatory side of the ledger will achieve
that goal. Some have objected to this from an accountability standpoint, but so long as
private companies are subject to the terms and conditions of renewable reinsurance
agreements, there will continue to be full accountability to the Government and taxpayers.
IBAA Supports Supplemental Products
6. Finally, Mr. Chairman, as suggested in our policy resolution, IBAA believes
expanded authority should be given to the private sector to develop creative programs and
policies to provide higher levels of protection at affordable prices. Companies already have
authority to develop supplemental products. But these products are subject to approval by
FCIC, and thus far, FCIC has been either slow or reluctant in approving new products.
One concept IBAA has endorsed is the concept of disappearing deductibles, under
which the deductible grows smaller as losses grow larger, so that if a farmer had a 100
percent loss, he or she would receive a 100 percent indemnity. This would address an often-
heard complaint from farmers and lenders that current coverage levels are not high enough to
justify participation.
Another idea we would like to see explored is converting the program from a yield
base to an income or cost-of-production base. Buying dollar per-acre instead of bushel per-
acre coverage is a concept easily understood by both producers and lenders, and it would
provide an assured cash stream on which credit could easily be evaluated.
Conclusion
Mr. Chairman, on Monday of this week. Secretary Espy addressed about 250 IBAA
bankers who had gathered here in Washington for our annual Spring legislative conference.
Secretary Espy made an impassioned plea to bankers to support his crop insurance reform
proposal, calling it a unique opportunity to enact good public policy. We couldn't agree
more. The Administration's crop insurance proposal will take the public-private partnership
that already exists, and strengthen it to the benefit of our nation's farmers and ranchers and
the communities they serve. In the process, it will save taxpayers some $750 million over
five years.
IBAA hopes that the Budget Conferees will support the Administration's request and
fully fund this new program, and we have told them so. IBAA also hopes that the
appropriations committees in the House and Senate will support the Administration's package
and provide the necessary funding, and we will tell them so. But regardless of the outcomes
in those bodies, we genuinely hope that you will take advantage of this opportunity to
provide for the long term protection of American agriculture, including farmers, ranchers,
lenders, agri-business, and Main Street shop owners, by approving the Administration's crop
insurance reform proposal.
Thank you, again, Mr. Chairman, for this opportunity to testify on behalf of our
nation's community bankers. I would be happy to respond to any questions you may have.
277
I^attpncd Association of Wheat Growers
/ /\ 415 Seco^l Street. N.E.. So.te 300, Washir^ton. DC 20002. (202) 547-7800
Chuck Merja
Secretary /Treasurer
National Association of Wheat Growers
Testimony
before the
U.S. House of Representatives - ^ .-
Committee on Agricultural
Subcommittee on
Environment, Credit, and Rural Development
April 21, 1994
Mr. Chairman, members of the Committee, my name is Chuck Merja, of
sun River, Montana. We have utilized crop insurance on our family wheat
and barley operation for many years. I thank you for the opportunity to
present my views on crop insurance to the Committee. I am serving as
secretary/Treasurer for the National Association of Wheat Growers.
A revised Federal Crop Insurance program has been a long-term goal
of our organization, and we urge the Committee to move forward with
consideration of the crop insurance reform proposal contained in the
Administration's FY'95 budget request. ^
Fifty-five years ago wheat was the first commodity to be covered by
Federal Crop Insurance, and the industry's need for effective price and
yield risk protection continues to be a major goal for the NAWG. We are
familiar with the Administration's proposed reform of crop insurance and
disaster aid, and we believe that the plan's principal features provide
a strong basis for development of a viable new program.
WHEAT DOLLARS ARE IMPORTANT TO THE NATCNAL ECONOMY AND VOUR BUSINESS'
278
In standing behind the fundamental concept of providing a low level
of catastrophic coverage to all farm program participants, we are taking
a bold step which many of us have previously been unwilling to take.
However, given the continued budget pressures facing all government
programs and the solid policy reasons favoring an insurance approach to
disaster relief, we believe the time is right to consider change to a
single predictable approach to disaster relief. The Administration's
approach reflects truthful budgeting, budget discipline, good public
policy, improved risk management options for farmers, and reduced costs
for taxpayers.
However, NAWG is unwilling to step completely away from standard
disaster authority. The best way to prevent the need for future
disaster legislation is to establish an adequate, workable, affordable
crop insurance program. In this regard, the NAWG supports continued,
standby authority for disaster relief programs, until such time as a new
regime of yield and price risk protection is proven to be effective.
Extensive debate has already occurred over who delivers the
castastrophic coverage in the reform package. This topic was also
debated as part of NAWG's resolution process. We are comfortable with
the proposed dual delivery system. We believe the existence of private
and public delivery will guarantee widespread, well serviced, delivery
of catastrophic coverage. We would challenge the critics of public
delivery to out-service and out-sell public delivery systems rather than
try to politicalize the issue.
279
3 -
Another topic of debate has been the linkage of program
participation and the catastrophic coverage plan. The NAWG understands
the reasons for linkage; however, we must strongly emphasize that costs
are to remain truly a nominal processing fee and are not to be connected
to risk, acreage, or crops.
NAWG knows of the interest in expanding FCIC coverage to new crops.
However, we don't want to see limited resources spread too thin while
the program is still inadeguate to meet the needs of the seven
commodities (including wheat) that comprise 75% of the existing crop
insurance business and most of the potential new business. One of the
first issues FCIC should explore would be to develop a seed wheat policy
for producers raising high-value seed wheat. These producers tend to be
very low risk with adequate production records, however, they may not
utilize crop insurance due to inadequate price protection compared to
the higher value of their crop.
NAWG participated in a FCIC task force two years ago thai
recommended the new four-year, building to 10-year, actual production
history (APH) plan. As such, we are supportive of how the plan benefits
producers with good production history, who have been blessed with good
production the past few years. However, the change to the new, more
aggressive APH formula has not been without pain. Whether a reform
package moves through Congress or not, the highest priority for FCIC
should be to develop and implement an affordable catastrophic yield
clause to put the brakes on yield declines for producers with multiple
catastrophic losses. At the same time, the Administration's decision to
\
280
base catastrophic yield coverage from individual APH yields as opposed
to county average yields is a vital and important component of the i
current reform package. jj
Another issue which must be addressed, whether or not there is a
reform package, is the need for a de minimis yield clause. The lack of j
a de minimis yield clause for small grains continually makes a mockery j
of MPCI coverage when farmers with 100% losses have their payments 1
reduced by 2 or 3 bushels an acre because an adjuster has appraised the
yield at that level. This inequity is further exacerbated by ASCS
having a de minimis policy while crop insurance continues to lack such |
a clause. !
The final broad area which NAWG would like to emphasize has to do
with the level of federal crop insurance service provided to the
farmer/ consumer . It is our view that both private companies and FCIC
must become more customer oriented. We applaud FCIC's recent decision
to reinsure a new supplemental product. However, we are disappointed
that it took FCIC this long to utilize the new authority granted by this
committee in 1990. We would encourage FCIC and the private industry to
aggressively develop, approve and market supplemental policies. Our
stated needs for a seed wheat policy and a de minimis yield clause may
best be addressed with supplemental policies. Further, the on-going
policy debate regarding revenue insurance lends itself to the immediate
creation of a supplemental policy to fit that market niche.
281
The second areas of customer service is the market price election.
In the final days of 1993, the Federal Crop Insurance Corporation
relented to Grower concerns and changed the 1994 wheat market price
elections from the previously announced level of $2.80 per bushel to
$3.25 per bushel. This is a very significant and responsive improvement
for wheat producers and reflects well upon Mr. Ackerman's efforts as
FCIC Manager. However, it does serve to illustrate that marketability
of the product must come into consideration when establishing the market
price election. This final area of customer service is a serious
challenge to companies and FCIC alike, however, it is key to the success
of any reform package.
Mr. Chairman, members of the committee, thank you for the
opportunity to testify before your committee. We are committed towards
reforming crop insurance and addressing the public policy concerns of
risk management. I will do my best to answer any questions you may
have.
Thank you.
282
1521 New Hampshire Avenue, NW • Washington, DC 20036
OF AMERICA (202) 745-7805 • FAX (202) 483-4040 • TELEX 650-252-9879 MCI
PRODUCERS • CINNERS • WAREHOUSEMEN • MERCHANTS • CRUSHERS • COOPERATIVES • MANUFACTURERS
Testimony by Myrl Mitchell
of Lenorah, TX
on behalf of
The National Cotton Council of America
before
Subcommittee on Environment, Credit, and Rural Development
The Honorable Tim Johnson, Chairman
April 21, 1994
Thank you, Mr. Chairman for the opportunity to appear on behalf of the National Cotton
Council to provide testimony on the Crop Insurance Reform Act of 1994. My name is Myrl
Mitchell. I am a cotton producer and ginner from Lenorah, Texas who utilizes the multi-peril
crop insurance program as a necessary risk management tool for my operation. I serve as a
member of the Board of Directors of the National Cotton Council and as Chairman of its Crop
Insurance Advisory Task Force. We commend you for holding this hearing. The concept of
Crop Insurance reform is something our industry has wrestled with for many years. Reform is
essential if this program is to effectively replace disaster relief and entice more participation.
We believe the proposal to develop a new program is moving in the right direction.
The National Cotton Council supports the concepts included in the Secretary of Agriculture's
Crop Insurance Reform proposal. Obviously, the devil is in the details. I must caution,
however, that cotton producers are skeptical that a workable crop insurance program can be
developed. That is why it is critical that FCIC's staff continue to listen carefully to regional
concerns and develop provisions that truly make the crop insurance program useful. We cannot
design a one size fits all policy.
We are actively working with other commodity groups seeking full funding for the plan. With
proper funding, reform will provide improved risk management for producers. Passage of the
new catastrophic coverage program will eliminate the uncertainty of ad hoc disaster availability
and the proposal would provide producers with 50% yield coverage at 60% of the average
market price. USDA and 0MB assert, and we agree, that producers are better off under this
proposal than under a disaster bill at a 50% prorate. We are also encouraged by the reduced
premiums for higher coverage levels.
As many crop lenders require crop insurance for production financing, producers need the
certainty that a workable, properly funded crop insurance program provides. While still
skeptical of the precedent, producers have generally accepted the "voluntarily mandatory" aspect
of the catastrophic coverage of the reform plan as required for farm program and FmHA
participation with a $50 per crop processing fee. We acknowledge the plan provides for an
option for producer to buy the basic level of coverage at his local Farm Services Agency or
283
through private insurance agents. We are supportive of this option for producers. "Buyup"
coverage would only be available through private insurance agents. While our industry supports
the Administration's catastrophic program as the principal mechanism for reform, we also
maintain that flexibility with different coverage options is necessary to increase participation and
meet specific regional and crop needs. Since most cotton farmers would be interested in the
higher levels of coverage, we would urge further consideration be given to reducing the cost of
higher levels of coverage.
Mr. Chairman, in anticipation of action on crop insurance reform this session, the cotton
industry has hosted or participated in a series of meetings throughout the cottonbelt to hear
comments from producers on the Secretary's reform plan. It was Mr. Stenholm's idea to host
the first one in Abilene, Texas, and it went so well that we tried to model the later meetings
after it. I believe there is one going on right now in Congresswoman Lambert's district in
Arkansas. In these meetings in Abilene and Lubbock, Texas, Arizona, Georgia, Louisiana, and
Alabama, we have heard comments that can be condensed into five areas of interest or concern
with the current program and the reform proposal. FCIC Manager Ken Ackerman or someone
on his staff was at each meeting and listened to these concerns. In each area of interest or
concern, Mr. Ackerman and his staff have agreed that there is a need to address these concerns
and are already working on administrative solutions that, once perfected, will hopefully be added
to the legislation. The remainder of my testimony will focus on these cotton industry concerns.
The cotton industrv believes that the proposal should include a catastrophic yield adjustment
when calculating actual vields during disaster years. Administrative efforts to comply with
Congressional mandates to reduce loss ratios have relied to a great extent on the use of actual
production history, a concept our industry supports. Unfortunately this concept makes no
allowance for disasters and, in fact, severely reduces the coverage for a producer through no
fault of his own. Under the current program, a catastrophic loss year or "zero year" simply
goes into a producer's yield calculation without recognizing that he might not have another
disaster for many years into the future.
Thanks to encouragement from Mr. Stenholm and other members of this Committee, FCIC
fortunately has recognized this problem and has developed an actuarily sound proposal that is
still under consideration. This proposal would allow actual yields in disaster years to be
compared to various percentages of "T" or "D" yields, depending upon the number of years
records are available, using the higher of the two. This would increase the level of coverage
available while maintaining the concept of actual production history. Premium ratings would
continue to be based on actual production. Upon initial review by our industry, this approach
has merit.
Another suggestion that would enhance insurance reform would he the addition of a harvest
incentive when determining losses. Currentiy disaster programs contain provisions that allow
crop production to be zeroed out wiUiout harvesting if production estimates are less than harvest
costs A similar provision is needed for crop insurance. However, to prevent inaccurate
estimates of production, the application of harvest yield costs need modification
One method would be to allow producers to harvest a crop and receive credit for Uie harvest
cost That is to say, a producer would not have to count the producUon equated to the cost of
81-128 0-94-10
284
harvest against any loss. This would provide an incentive to harvest. FCIC along with
universities and other government agencies would have to determine appropriate harvest cost
yields for each region as harvest methods vary. Consideration could also be given for third
party verification on zero or disaster yields. This would strengthen the credibility of the
program and improve loss histories. In addition to improving the program, harvest incentives
benefit the processing and marketing industry segments.
FCIC is to be commended for their continued evaluation of optional products that enhance the
value of crop insurance to the producer. One of the points made at many of the regional
meetings was the need to have programs that entice non-users of the current program. We are
encouraged with programs such as price insurance supplements and group risk programs. One
concept that is particularly interesting to our industry is a program based on insuring cost of
production. Our industry is in the very early stages of developing this concept, but believe it
is viable. An individualized approach to insuring revenue losses relative to some level of cost
of production will be attractive to many regions of the cottonbelt currently not utilizing crop
insurance programs. We have received encouragement from FCIC Manager Ackerman to
continue to pursue this approach, and such work is underway. Other points brought out in the
meetings were the need to provide lower premiums for producers with good loss histories or
with lower risk operations. FCIC formerly had a "good experience" discount but discontinued
the practice. In fact some producers still have this better rate because of grandfathered clauses.
We recommend that this practice be re-instituted. Consideration should also be given to
premium setting flexibility on irrigated operations. For instance, in Western cotton growing
regions, irrigation is the norm and, therefore, results in less risk firom weather. They are also
highly mobile and would support a provision allowing individuals to transfer actual production
histories to similarly classed farms rather than being treated a "new" fanner and being assigned
an insured yield of 65% of the D yield. Participation would increase if these matters received
attention.
Often losses in crop quality are more economically devastating than production losses-
Improvements in the quality adjustment provisions for cotton are needed to make it more
effective. USDA has developed a universally-accepted cotton classification system that very
accurately describes the quality of our product. Upon review of the current cotton quality
adjustment procedure, we believe a better utilization of this classification system rather than spot
price differences would better reflect quality losses. We are in the process of analyzing the way
the current program is being administered to determine how it can be refined. We hope to have
this analysis completed soon with recommendations on what changes are needed. We think this
is an area where we can actually save the program money by better insuring quality losses due
to damaging weather. We also support eliminating the current 25 % deductible for quality losses
that is unique only to cotton.
The current Administration proposal only applies to a producer's acreage on a county basis and
does not address farm units (i.e. fields or sections'). Effectively, this could mean that an
irrigated farmer could pay the same premium as a non-irrigated farmer although the risk is
considerably less. While we realize that this will impact how the subsidy is distributed, we
maintain that consideration of smaller better defined units will improve the program and make
it more effective.
285
For crop insurance reform to be successful, credibility must be restored to the program. Abuse
of the program must be minimized. FCIC recognizes this liability and is seeking ways to
strengthen its review. We support effective oversight so that benefits accrue to those who
deserve it.
Thank you again, Mr. Chairman, for allowing me to present testimony here today on behalf of
the cotton industry. We have a vested interest in a workable program both as farmers and as
taxpayers. We have received good cooperation from FCIC on cotton industry concerns with the
administration proposal and we look forward to working with this Subcommittee and the Full
Committee on Crop Insurance Reform. I would be happy to answer any questions that you or
the other members of the Subcommittee might have.
286
National Family Farm Coalition
no Maryland Avenue, NE, Suite 307 • Washington, DC 20002 • (202) 543-5675 • Fax: (202) 543-0978
Testimony of Katherine Ozer
on behalf of the National Family Farm Coalition
before the
Environment, Credit, and Rural Development Subcommittee
of the House Agriculture Committee on
Federal Crop Insurance Reform Act of 1994
April 21, 1994
My name is Kathy Ozer. I am the Director of the National
Family Farm Coalition (NFFC) which represents 39 family farm and
rural advocacy organizations in 30 states. Our organization was
formed in 1986 to provide both a link and a voice for family
farmers in the debate over federal farm and food policy.
I cun testifying here today to strongly support a change in
the way the federal government prepares for and responds to
disasters which strike at the livelihood of family farmers.
Farmers need a farm policy that works and a disaster and/or
insurance program that is accessible and affordable. If farmers
received a fair price at a level that more closely meets their
cost of production, it would be more plausible that a "bad" year
is not as economically devastating.
The NFFC supports the USDA proposed disaster and crop
insurance program with a few changes . We support the Federal
Crop Insurance Reform Act of 1994 provision that would require
catastrophic coverage for participants in any farm program. The
package of coverage needs to provide economic security for
producers of all crops and in all regions. A concern is what
level of loss does this catastrophic level translate into? Our
understanding is that it would trigger in once a farmer has lost
50% of production and pay at 60% of the price. This price
however could fluctuate and could be lower than the target price.
Would the funds needed to meet these losses be considered an
entitlement in the budget in exchange for removing the emergency
off-budget nature of current agriculture disaster proposals? If
not, this government disaster level could be reduced by a formula
based on the availability of limited resources which would
undermine the whole system.
The other major question that has been raised by our
Disaster Task Force that has reviewed the proposal is: What
happens before the catastrophic disaster coverage kicks in? Our
understanding is that private crop insurance sold through crop
insurance agents or ASCS would be available. The critical
recycled paper
287
question is, "at what price?" Our concern is on the price to the
farmer struggling to meet cash-flow and budget projections and to
the federal government in the form of subsidy payments to provide
the insurance. It is in this area that we have come up with a
proposal to help farmers "self-insure" against some of th\eir
possible losses. It would be through an expansion of the current
Farmer Owned Reserve to make it into a true disaster reserve.
This reserve could be released by ASCS when and only when a
certain loss level had been reached on the individual farm or
within a county. We would propose that it be in the 65-70% production
level. In these cases, a farmer could still purchase crop
insurance to protect against initial losses before the 65% level.
The grain taken out of reserve would then be available for
orderly marketing.
We propose to establish a level of bushels of each commodity
that the government wants to have on reserve and off the market.
The grain in the disaster reserve would not be eligible for a
loan. Farmers could be eligible for a cost-share payment to build
or maintain high quality grain storage. Farmers would continue
to receive the farmer storage rate instead of the higher
commercial rate. We know that our proposal is more easily
applicable to wheat and feed-grains and some other storable
commodities but feel that it should be considered as part of the
package as we address the different options that could work
together to cushion the weather risk.
We would ask that the Subcommittee look at the costs to the
federal government of the insurance subsidy for wheat and feed-
grains for this range of protection in contrast to the costs of
an expanded grain reserve. As part of this analysis, we would
also request the impact on net farm income if a farmer had these
two types of coverage and the same level of loss.
Who needs to be covered? These programs need to respond to
the family farmer who has made the transition from corn and
soybeans to growing produce for a local farmers' market as well
as the diversified farmer who milks 50 cows and raises 100 acres
of corn but still buys hay for feed. Beginning farmers or
farmers making the transition from conventional farming practices
to low or no chemical use must not be penalized by a long
requirement of 4-10 years of personal crop history to avoid a set
reduction of 35%. Minority farmers who have historically been
under-represented in farm credit and federal farm programs should
not be doubly hit by loss of coverage in a disaster. These are
the farming businesses and operations that all too often are
already the most vulnerable due to other situations. These new
programs need to minimize the risks not increase them.
Last summer, the flood in the Midwest and drought in the
Southeast became the priority issue for our organizations
throughout the country. It has been as crisis/credit
intervention, pushing for legislative and administrative changes
288
in the disaster program, and educating farmers and others in the
rural community about what is and should be available. The
impacts of last years weather is felt far beyond the flood
waters. Every dairy and livestock farmer has been facing
increasing feed costs. For those who produced hay crops without
value, USDA stated that they couldn't produce a formula to
calculate loss and there was still some value in that it could be
used as "bedding".
It has been a frustrating process to say the least. In
Missouri, where yesterday's Washington Post talks of 33% of the
nation's $10 billion of flood losses; there were only 241
applications for FmHA emergency loan. Of these, 67 have been
approved. There are only two small areas in Missouri that are
still accepting applications. 2.1 million crop acres were lost
last year. Is this low application rate due to lack of
information or frustration? I certainly doubt it is due to
existing disaster coverage and crop insurance premiums providing
enough to keep farm businesses going. In fact most of these
farmers have no idea whether they will be able to grow a crop
this summer or have access to credit to purchase inputs. In Iowa
over 2,000 farmers filed FmHA Emergency Loan applications on the
deadline. For many others the information about having to pledge
150% of ones assets for every $1 of the loan created a barrier.
FmHA sensibly reduced that level to $1 of security for every $1
of loan but this change didn't take effect until after the
application deadline for most states.
The disasters of 1993 put the capacity of USDA and other
government agency disaster response systems on the line. In many
cases they failed miserably. What is the responsibility of USDA
to publicize and inform farmers and their communities about these
deadlines and changes? Are local offices even aware of the
changes? Are there informative and accurate materials
distributed by USDA to help farmers understand and decipher the
maze of rules, regulations, and deadlines that govern these
programs? We would contend that USDA needs to make it much
easier for farmers to access their programs and become much more
farmer- friendly. Farmers Legal Action Group (FLAG) produced an
excellent Farmers Guide to Disaster Assistance. These types of
manuals need to be supported by USDA and to ensure its
dissemination to farmers and agency personnel.
It is now - the spring of 1994 when farmers are trying to
obtain credit and assess the real damage of the past year. FmHA
is now starting to foreclose after their March 1994 lifting of
their year-long "suspension" which could hit many of the same
farmers with a double whammy. In addition, there is legislation
brewing to make changes in FmHA debt restructuring resulting from
their credit reviews but primarily prompted by the "wealthy FmHA
borrower" press from late January. We are concerned that these
changes not remove existing borrower rights from farmer/borrowers
in the rush to change the system.
289
NFFC supports a comprehensive approach to disaster and farm
policy that helps to ensure that family farmers do survive. We
urge you to continue asking these important questions and find
the answers. The policy put in place now must work to make sure
that natural disasters do not force farmers out of business, just
like an insurance system helps to ensure that fire, loss, or
disaster should not make me homeless. We are talking about
homes, jobs, and livelihoods that are very vulnerable due to
current inadequacies in the crop insurance and disaster
provisions. We look forward to working with this Subcommittee on
this important issue and appreciate the opportunity to present
this testimony. I would be happy to answer any questions.
290
STATEMENT OF THE AMERICAN FARM BUREAU FEDERATION
TO THE SUBCOMMITTEE ON ENVIRONMENT, CREDIT AND RURAL
DEVELOPMENT OF THE HOUSE COMMITTEE ON
AGRICULTURE
REGARDING FEDERAL CROP INSURANCE
Presented by
Doyle Rallies, President, Kansas Farm Bureau,
and Member, AFBF Board of Directors
Mr. Chairman, thank you for this opportimity to testify on crop insurance
legislation on behalf of the American Farm Bureau Federation with its 4.2 million
family members from across the nation.
My name is Doyle Rahjes, and I am the president of the Kansas Farm
Bureau and a member of the Board of Directors of the American Farm Bureau
Federation.
As a member of the National Commission for the Improvement of the Crop
Insurance Program, which completed its work in July, 1989, I hope to share with
you both my experience there and my activities on crop insurance within the
Kansas and American Farm Bureaus.
At the AFBF 1994 Annual Meeting held in Ft. Lauderdale, Florida, the
voting delegates reaffirmed our long-standing policy that crop disaster programs
and crop insurance should be combined into a single program designed to obtain
the greatest amount of participation.
That is why we feel the objectives and the techniques of the
administration's crop insurance proposal are worthy of serious consideration by
Congress.
We do, however, have some reservations about certain provisions in the
proposal that we feel are contrary to achieving full participation and which apply
tinnecessary eligibility tests that would further discourage fUl participation in
both the crop insurance and the price support programs.
Farm Bureau policy is very clear that participation in a crop insurgmce
program should remain voluntary and that there should be no mandatory linkages
between farm program participation and Farmers Home Administration loan
eligibility and crop insurance. The current proposal does not satisfy that
requirement. Even though the linkage in the proposed program is limited to
participation in the catastrophic coverage portion of the crop insurance program at
a nominal fee, it establishes a mechanism that coidd become very burdensome for
291
producers. Moreover, we are concerned that the nominal costs of the mandatory
portion of the program would set a precedent for the futvu-e. A cap on
participation fees for catastrophic coverage which is set at $100 today could
escalate rapidly under future budget pressures, yet producers would be required to
participate whether or not they get any real individual benefits from the program.
In brief, we believe that a well-designed and attractive volimtary program will
work much better. Voluntary access and freedom to participate always win over
government coercion.
Another important concern is the linkage between crop insurance and farm
program participation. If this linkage is made, then Congress would face a very
difficult task of making sure that appropriate measures are taken to isolate the
catastrophic portion of the coverage from future budget reconciUation
considerations. About $700 million in new money is being requested by the House
for the crop insurance reform effort based on previous program crop expenditures
resulting from ad hoc disaster legislation. There is concern that if funding
remains at the $700 million level, non-program crops might be treated inequitably.
If there were farm program crop overruns (particularly if parliamentary changes
make it increasingly difficult to pass ad hoc disaster assistance for non-insured
crops), then non-covered crops would likely receive reduced or pro rated benefits.
We have a number of specific concerns about the levels of coverage. First,
the 50 percent yield loss provision of the "basic coverage" provides substantially
less coverage for moderate losses than disaster programs that have been
implemented in recent years. In other words, disaster fiinding has been applied to
losses below 65 percent of normal production, whereas the proposed crop
instirance reform "kicks in" only for yield losses greater than 50 percent. Another
shortcoming of the crop insurance reform package is its reUance on yield as a
trigger mechanism for insurance payout.
Farm Bureau strongly favors coverage based on dollars per acre rather than
yield. Reliance on yield as a trigger mechanism tends to skew the program in
favor of high-risk production acres and makes it much more likely that gaps in
coverage will exit.
Second, with respect to the "buy up" provisions, it is unclear as to where,
and from whom, producers must purchase this coverage. Here there is another
potential gap in coverage. By virtue of it being a yield-triggered pay versus a
dollar per acreage coverage, even if narrowly drawn, there is an invitation for
future retrenchment of program benefits, and as such make the overall crop
insurance plan less effective when the day comes that a future Congress will be
urged to provide disaster relief beyond that provided by the crop insurance
program.
292
Finally, there are a number of provisions in the administration's proposal in
Section 522, the "non-insured assistance program" that we view with great
concern. They include:
" (8) A person who has qualiiying gross revenues in excess
of $2 million annually, as determined by the Secretary, shall not be
eligible to receive any non-insured payment."
This section then goes on to define "qualifying gross revenue".
Granted, the scope of this language is fairly narrow, and the $2 milUon
threshold might appear to many observers as high, there is great mischief afoot in
establishing a "means test" in tiiis legislation.
Veteran members of this committee will recall the 1990 Farm Bill debate
and the floor struggle necessary to avoid a much lower $100,000 means test
amendment for price support program eUgibihty.
It seems obvious to us that the $2 million level or any stated level will
become an early and easy target for budget cutters.
Another troublesome provision in Section 522 also states as follows:
"(e) payment limitations - (1) The total amovmt of payments
that a person shall be entitled to receive annually under this
section may not exceed $100,000."
The section goes on to define "person" along the same lines as now apply to
price support programs.
Finally, the language regarding the estimation of yields by averaging
observations from a minimum of four previous crop years needs to be clarified for
fruits and vegetables. For some fruit and vegetable operations in the more
temperate climatic zones, there may be several crops planted sequentially in the
same calendar year. In light of this, is the intent of the legislation really yields of
crops planted in "four continuous crop years," or "four consecutive crop plantings?"
In summary, Mr. Chairman, we feel this proposal has many attractive
features, and the basic idea behind it is sound.
However, we hope you and the rest of Congress will amend it by deleting or
changing the provisions we find covinter productive and unfair.
293
TESTIMONY OF LELAND SWENSON, PRESIDENT OF THE NATIONAL
FARMERS UNION, REGARDING CROP INSURANCE REFORM, PRESENTED
TO THE HOUSE AGRICULTURE SUBCOMMITTEE ON ENVIRONMENT,
CONSERVATION, AND RURAL DEVELOPMENT.
On behalf of the 250,000 families of the National Farmers
Union I wish to thank you for holding this hearing on H.R.
4217 and the reform of federal crop insurance. Delegates
to our 92nd annual convention held this spring in Fargo,
North Dakota, expressed strong support for improving crop
insurance with the addition of catastrophic coverage.
Attached as exhibit A is a copy of the special order of
business from the delegates.
My testimony today will address the following items
included in the H.R. 4217:
1. Repeal of ad hoc disaster
2. Establishment of catastrophic coverage
3 . Linkage to farm programs
4. Delivery system of crop insurance
5. Industry competition
6. Assistance for uninsurable crops
7. Actuarial soundness
8. Budget authority
9. Adequacy of higher levels of coverage
10. Federal Crop Insurance Advisory Committee
Repeal of Ad Hoc Disaster - National Farmers Union
supports the repeal of ad hoc disaster authority if
catastrophic insurance is made available to producers at
an affordable price.
The Adequacy of Catastrophic Coverage - H.R. 4 217 would
provide protection against losses greater than 50 percent,
at a payment rate of 60 percent of the expected market
price. This yields coverage of about $.30 per dollar of
loss in a complete disaster year.
The proposed level of coverage compares to the 1993
disaster program which paid $.42 per dollar of loss, and
the 1992 program which paid $.19 - $.21 per dollar of
loss, depending on whether the producer had purchased crop
insurance .
The adequacy of the catastrophic coverage will depend on
how losses are calculated, as well as how the payment rate
is determined. We support the provision which allows
producers to choose whether to use actual production
history (APH) or area yield. We would like to strengthen
the language to require that both are offered. We further
recommend that APH should be calculated by excluding
production from disaster-declared years.
294
We also recommend that the payment rate is increased to
100 percent of the expected market price.
Linkage to Farm Programs - We support offering crop
insurance as a benefit of farm program participation. We
further support requiring participation at the
catastrophic level, as long as the cost of participation
is limited to $50 per crop, per county, with a cap of $100
per producer per county.
Delivery System - Dual delivery offers producers the
option of where to obtain the catastrophic coverage. It
also raises some questions. Who will do the adjusting?
Who will pay the administrative cost if the producer
obtains coverage from both Farm Service Agency and the
private agent?
We support providing additional coverage through a private
agent. We also support waiving the administrative fee for
those who sign up for coverage greater than the
catastrophic level .
Industry Competition - We support allowing private
insurance companies to compete on lower rates and increase
the level of available coverage.
Assistance for Uninsurable Crops - We support providing a
permanent disaster program for uninsurable crops.
However, we believe a producer should establish a crop
production history before becoming eligible for disaster
assistance. This will prevent producers from farming the
program.
Actuarial Soundness - We support the goal of approaching
actuarial soundness. We believe this will be better
accomplished by implementing the use of actual production
history.
Budget Authority - We support increasing the budget
authority to accommodate the funding request of the
Administration. We would point out the additional
spending will result in savings of $750 million to $1
billion, over a five year time period.
Adequacy of Higher Levels of Coverage - We believe that
crop insurance will not provide adequate loss protection
unless producers participate in levels of coverage higher
that the catastrophic coverage. We believe coverage
should be available to allow the producer to cover the
cost of production, including yield coverage at the 65,
75, and 85 percent levels.
We further recommend that a premium subsidy is offered to
encourage producers to participate at these higher levels.
295
Producer participation in the catastrophic level alone
will provide insufficient loss protection and will create
a demand for disaster assistance.
We support provisions in the bill which require producers
to be offered coverage for loss of yield and prevented
planting.
We support the provision which allows the producer to
choose between APH or area yield when both are available.
However, we would like to go an additional step by
requiring that both be made available.
Federal Advisory Committee - We support the establishment
of the Advisory Committee for Federal Crop Insurance.
However, we recommend requiring that at least half the
board be comprised of family farmers.
Stimmarv
We offer our strong support for the reform of crop
insurance and we stand ready to work with the
Administration and Congress to ensure that the final bill
will address the needs of producers as well as minimize
budget exposure.
(Attachnent foll-ows:)
-3-
296
Special Order of Business
Federal Crop Insurance Reform
We commend the Administration for supporting the reform of
the Federal Crop Insurance program.
We support provisions which would orovide catastrophic
coverage as a requirement of participation in commodity
programs or Farmers Home Administration lending programs.
We support allowing producers to base yield coverage on
actual production history (APH).
We support offering producers assistance to purchase
coverage above the catastrophic level.
We support offering coverage for late or prevented
planting.
We call on Congress to make the following additions to the
above-stated provisions:
1. We support allowing producers to exclude disaster
years from APH calculation.
2. We support adding an additional level of coverage
higher than the 75 percent level.
3. We support basing expected price on the higher of the
target price or the 5 year rolling average of the 12 month
market price.
4. We support requiring insurance companies to offer both
APH and area yield options to producers.
5. We support maintaining the Secretary's authority to
call for disaster assistance if needed, recognizing that
these reform provisions will significantly reduce the need
for disaster assistance.
National Farmers Union Convention
Special Order of Business
Adopted March 7, 1994
Exhibit A
297
STATEMENT OF
MICHAEL CONNEALY
RmAL COMMUNITY INSITIANCE SERVICES, INC.
BEFORE THE
SUBCOMMITTEE ON ENVIRONMENT, CREDIT, AND RURAL DEVELOPMENT.
COMMITTEE ON AGRICULTURE, US. HOUSE OF REPRESENTATIVES
APRIL 21. 1994 ^
Mr. Chairman and Members of the Subcommittee:
On behalf of Rural Community Insurance Services, Inc , we appreciate the oppom»ruT>- to
taetify b«fora this Subcommittee concerning the Federal Crop Insurance Reform Act of
1994 Rural Community Insurance Services is a whoUy-owTicd subsidiary of Norwest
Corporation, a bank holding company Norwesi, as a principal provider of farm operaiing
loans to those in rural communities and businesses that support rural communities,
considers the crop insurance program to be an eisential part of the fabric of those
communities. It is 'out hope that a concrete and meaningful crop insurance prograin can
be continued by Congress regardless of 'reform" This proposal addresses many of our
concerns, and thank you for the invitation and the oppormnity to share our thoughts with
you today.
Mr. Chaiinun, we would like to begin by addressing individually t.Kt twelve issues that
you posed in your letter of April 8th.
• file adequacy of prcmiam nibiidiet for catastropliic and boy-op cowrj** for injnrable crops
It is our position that the premium subsidies are more than adequate to encourage
participation (jovemment, in this case, can "lead a horse to water," and ihc subsidy
can't be cjcpected to do more than that. The current converiuonal program is
adequately subsidized in our opinion. Ta.xpaycrs should not be expeaed to do much
more for this "self hdp" program, in our opinion.
• Tbe praeeMiBf fc* «»$S0 per producer per crop per countjr, not » mtti\ SlOO per producer per
csoBt;
We feel that a fee is appropriate for the farmer to pay. however. urJes? all the
expenses can be reimbursed to agems and companies for administering this level of
coverage, we feel private sector delivery of the "caustrophic- coverage will oe
inhibited.
298
• Tke rMpiiremait for prodnoert to obtaia cUMtrophic emtntf to be disibte for pries support,
prodacthM tdiuitnieiit tad conienrttion programi
We are not opposed to this requirement; however, we could see where 8 "vnuvcr ' of
some oature could be considered to reduce administraavc costs where "low
leveraged" projducers are concerned. A "waiver" would forfeit all benefits to any son
of disaster" declaraticm.
• Th« diul dolivory wyttmMt CAtaotropbic coverag* miy b« porcbaacd ciiber at USDA tcrvicc
caotart or tbroncji piivata ounrwica agents; additional coverage maj be porchased oaly f ron
privata agBBti
The expense required to enable the ASCS offices to "sell" this catastrophic coxerage
nrijitt prove to be a concern; however, in light of the limited expenses allowed the
private sector, !the dual delivery system can't be arg;ued against It is our position that
requiring the purdiase of additional coverage through private agents will work well,
as the dclivciy system already exists. This is essential to the program, making sure
that decent "buy ups" are available We must focus our efforts on those producers
that need "real" coverage.
• Tbc luc of actaal production bistory (APff) for the 4 prcvioiu crop ya*rs, baQding up to 10 yeant,
and tba um of traa^iooal yi«id« fT-yUldi) if APH ii not available
This idea is acceptable, as long as precautions are taken in design to avoid skcwjig
the formulas against those faimcrs who are new producers, are adding new land, or
have suffered catastrophic loss years. This is true for ratLng issues as well
• Tbc prwisioDS foritonittiurabk crops
Due to the inherent business risk that is part of the nature of agriculture, rt would be
hard to axBue fiar goveniment involvement in such instances Utere there ;s no aop
insurance proffram, there is usually a good reason., let's look at the economic impact
of ''with or without" govemmeDt involvement We could do well not to "mess up"
p^iere were not needed....
• The likelibood that ad hoc disaster prosnuns will no looser be available
This is a great idea that we hope becomes reality. Ad hoc disaster assisunce should
never again be available regardless of the movement on the crop insurance reform
Self-help, risk retention, and discipline should provide a sufficient backstop for those
producers who now enjoy the payments provided by the ad hoc disaster programs
These payments are directed to many who have a 'limited" need or arc doubled vvith
crop insurance.
299
• The expaue rdmbaneawBt tarmuU for privMe iniaraacs conpuiw
Our studies and experience have shown iJui the expense reimburscinem formula is
not sufflciem to deliver the prograrc with the degree of detail and integrit> denur.dcd
by the Federal Crop Insurance Corporation It is ou: position that when you look
carefully at all of the costs that are incurred, the govcmment ii getting more than its
moneys worth. The operating risks are so great that 50 pluj prvat; sector
coatraaors in the carij- 1980's are now reduced to fewer than 20 Our (Rurai
Conuaunity Insurance Services) operating losses were substantia] in 1992 and 1993
Loss adjustment e:q)enses need '"extra" attention for integrity purposes F:nal!>, it's
time to STOP taking d»e sales and procejsing work for granted — curreniiy
performed by our local tndep«Klent agents. These laborers arc worth> of their hire
and v.-e need to keep them as a motivated sales force
• The pnmsioa to allOM prn-ate insanace coapmiet to lovrer tbe rates cbarsed lo Droduccrs
This provision is not in anyone's best interests, and would likely encourage rebates by
agents as well as other avenues of unfair discrimination. Wc can thini; of no reason to
pursue this issue.
• The aon-sundard dauiricatioa lystcn
It is our position that the rwrv-standard classification system is working e.>.tmncl>
wen. As long as the system is "tested" and a reasonable appeal process is in place, it
protects the vast majority of producers from the bad luck or the "acts" of a few
• Tbe croup riik plaii
The program works adtnjuaidy with crop programs in trouble, such as Southeast
soybeans and Midwest fi>rage. However, for most of the crop programs, iht group
risk plan has proven to be a questionable use of moncj'. resources, and time m cui
opinion.
• The market value protection piaa
We agree philosophically that the govemmem should entenain and encourage product
development in the private seaor, however, attempts should also be made to enhance
the basic crop insurance product For example, with an enhanced and strengthened
basic product, most producers who buy crop insurance would need fewer products
like the market value protection plaa
3 -
300
ADDITIONAL COMMENTS.
The conventional crop insuranca program is in ecMntial and imponant tool to Korwett is
a lending insdtutioii, even more so than as a proccsjor of insurance dccurimts No^^^■cst
is conui^ed to rural America; we are said to be the second largest Ag leader in rural
communities in tlie United States Whether Norwest lends money to a fiimily farmer or to
a business such as a seed or fertilizer dealer that sells its products on credit, crop insurance
ultimately provides an important level of collateral, especially for younger farmers v-hc co
• not yet have significant equity in their land or equipment
The crop insurance program is essential to the creditworthmcss of these Carmers and.
therefore, to the viability' of our rtiral communities and towns Those conummiiies and
towns, their churches, schools, hospitals, ar.d businesses ore heavily dependent on farm
income, and therefore arc as much afiected by uninsured natural disasters as are :bc
fermers whose crops have been destroyed. The Federal Crop Insurance program is as
much their risk management tool as it is for the farmers who purchase the policy
If conventional crop insurance is eliminated or signific&cdy reduced aj s source o'
collateral, the availability of credit will diminish immediately and the consequences cf each
major storm or drought will affect not onl> unmsured or undcnnsured £amner3 bu; wdl
resound through evety rural conununity. This is "ESPECIALL"^"* tnie of younger fanners
or high leverage farmers whom we should try to help Government need not worry abou:
*Svealthy" or low leverage formers; subaidv dollars arc questionable in our opinion, when
sent to [hose who don't need them.
In 1992. Norwest had a national loan portfolio of about $775,000,000 on what could be
described as land or operating loans including FNIRA guaranteed loans These loans were
made with the expectation that proceeds from the sale of the crops were going to repay
the loans plus ttic interest. "We have a risk rating method which scores the loan from a
high of "one" to a low of 'seven" Those operators rated as "one," "two," or "three"
would Ckely not be adversely aSeded by the loss of a meaningful crop insurance program
These loans amounted to $220,000,000 or 28 percent of the toial Those rated oj "five.'
"six," or "seven" would most likely be gone from the portfolio — additionally, we would
consider reducing or dropping Farmers Home Guarameed Loans These amounted to
$157,000,000 or 20 percent of the total. Those rated as a "four," would be affected by a
higher rate, reduced operating line, or no loan at all The impact of this 52 percent wou'd
be significant and costly to the borrower, and uhimately the rural community in which they
live.
Norwest's main interest in the crop msurance program is as an a£ lender, and our main
interest in the re&mn of the program is as a lender. We also have a strong interest in
genuine refbnos in the program that will benefit our reinsurera, our fiimers, and our
agents. Each pardcipant of this program needs to be accountable and also rewarded for
quality pcrfonnance. This includes &nners with low levd of loss
301
Norwest and other ag lenders (our opinion) already require crop insurance for those who
are in financial need; and if there were a choice on the amount of reform, our preference
would be to keep the conventional program mtact or enhanced (ejjk* the farmers are
already comfortable with the pro|xam, see the benefits, and arc partidpaiing) before
pushmg ahead with a great deal of experimental reform Especially refom aur.cd at a
"catastrophic coverage" that amotmts to "0" additional ag loans emanating from the
private sector.
Thank you for the opportunity to appear before the Subcominittec, and I would be happy
to answer any questions that you may have
302
Testimony of
John H. Joyce, Chairman
Robert W. Post, Jr., Vice Chairman
on behalf of the
American Association of Crop Insurers
Before the House Agriculture Subcommittee on
Environment, Credit and Rural Development
Regarding the Federal Crop Insurance Reform Act of 1994
April 21, 1994
Mr. Chairman, Mr. Ranking Member, and members of the Subcommittee, thank you for
the opportunity to present our views on H.R. 4217, The Federal Crop Insurance Reform Act of
1994. These views are expressed on behalf of the American Association of Crop Insurers
(AACI), a voluntary membership trade association of the private crop insurance industry. Our
association consists of insurance companies, private reinsurers, local crop insurance agents and
adjusters.
I am President of Rain and Hail Insurance Service, Inc. of West Des Moines, Iowa which
writes federally reinsured multiple peril crop insurance (MPCI) nationwide as well as private
crop hail, and fire and allied lines of insurance and I currently serve as Chairman of AACI.
Accompanying me is Bob Post, who is President of Domberger/Berry & Co. which is now a
wholly owned subsidiary of ITT/Hartford, who serves as a Vice Chairman of AACI. AACI
members write over 60 percent of the U.S. MPCI policies that provide peace of mind for over
700,000 policyholders.
THE OPPORTUNITY
We find ourselves presented with perhaps the greatest opportunity of all time to improve
the crop insurance program. Finally crop insurance can be established as the sole means of
providing producers with financial protection against crop disasters, as it was originally intended
to be following the 1980 Act. We've seen a lot of reform proposals since 1980 as well as
considerable ad hoc disaster funding and emergency loans handed out. However, at no time has
there been such a consensus for reform or an apparent willingness to merge the ad hoc disaster
payment approach into an improved crop insurance program as was the original intent.
The Administration's plan provides: catastrophic insurance coverage on about 50 crops
to all farm program and lending participants; added incentives for purchasing additional
coverage; and disaster protection for all other crops. We commend President Clinton, Secretary
Espy, 0MB Director Panetta, Under Secretary Moos, and FCIC Manager Ackerman and their
staffs for putting this package together and for choosing what is undoubtedly the best policy
approach for addressing crop losses — insurance. Regardless of the outcome of the Budget
Conference activity, we need to thank Representatives Stenholm and Pomeroy for their
tireless efforts on getting the added funding for the reform proposal.
A NEW MINDSET IS ESSENTIAL
No matter what legislation is passed by Congress, a reformed crop insurance
program can only reach its objectives IF THERE IS A COMPLETELY NEW MINDSET
ON ALL FACETS OF THE PROGRAM ON THE PART OF USDA (FCIC/FSA), THE
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COMPANIES, FARMERS A>fD CONGRESS. We must focus on a greatly simplified
program both for the catastrophic coverage and additional coverages that will be available. A
new program in the old package will not work. A completely restructured program in both
appearance and function is what it will take to convince farmers that real reform has happened.
Overall, we believe that there could be at least a one-third reduction in the administrative
requirements of the crop insurance program without adversely affecting program performance.
At the same time we are working cooperatively with the administration in support of this
proposal, we have been presented with a draft reinsurance agreement that adds many new costly
administrative requirements with limited program benefit to an already needlessly complex
program. Unless USD A (FCIC/FSA) is willing to work with the industry on completely
evaluating the need and existence of all current administrative burdens neither the current
program nor a reformed program can be delivered in today's restrictive budget
environment.
OUR OBJECTIVE
We, along with others in the industry, believe that the objective of any crop insurance
program must be the provision of incentives and opportunities for farmers that permit them to
adequately and affordably manage their production risks. The risk protection provided must
meet farmers' most basic income and financial needs if a natural disaster strikes.
In achieving that chief objective, universal availability of a catastrophic coverage at litde
or no charge, by itself, will not be sufficient. Significant participation at greater than
catastrophic levels of protection is necessary to adequately protect farmers. ONLY through a
continued significant involvement of the private sector in the risk bearing and delivery of crop
insurance can Federal dollars be fully leveraged to meet these objectives.
In general, the Administration's reform proposal deserves positive action by the Budget,
Appropriations, and Agriculture Committees of Congress. Furthermore, for farmers to be able
to get this much needed protection in 1995, the action of the Congressional committees needs
to occur very swiftly. However, in order to help the program achieve its maximum effective-
ness, we feel that a number of refmements need to be made in the proposal.
These refmements can be categorized in three general areas:
■ Program Simplification
■ Program Delivery
■ Reasonable Remm for Private Capital Invested
PROGRAM SIMPLIFICATION
Farmers are our customers. Therefore, we want to make the program as easy to
understand and as simple to participate in as possible so that we can maximize farmer
participation. At the same time, a simplified program reduces the government's expense as well
as that of the companies involved. Industry and farmers alike are very familiar with simplified
procedures of the crop hail program and perhaps several aspects of that program may serve as
a model for simplifymg the MPCI program.
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The principle of simplification should be foremost in the formulation of the catastrophic
level of coverage, as there will be some farmers who are participating against their will.
However, it is vitally important and wholly justified that whatever simplification measures are
adopted for the catastrophic level should also flow through the rest of the program as well.
Otherwise, a major disincentive for participation at higher levels of coverage will be created and
the opportunity to reduce program costs will be foregone.
ALTERATION OF COVERAGE LEVELS NEEDED. There is some complexity in
the Administration's proposal as it relates to levels of protection that we believe: is unnecessary;
adds confusion; and adds administrative costs to the program. The proposal contains three
classes of protection: the 50/60 catastrophic policy; policies between 50/60 and 65/100 or its
equivalent; and policies equivalent to 65/100 or higher. The provisions regarding the middle
range of policies need improvement.
For simplification purposes, we question the need for offering a range of 50 percent yield
coverage/price election mixes given the minimum cost of such policies and the thrust of the
proposal which is to have as many farmers adequately protected as possible. It might be
advisable to only provide a 50 percent yield, 100 percent price election policy as the next step
beyond 50/60. This is a significant increase in liability protection for the farmer, especially
when one considers that optional units are available at this level, while only costing a minimal
amount.
Providing coverage at this mid-range level is also worth full expense reimbursement and,
given the reduced premium levels, would not significantly exceed, if at all, the minimum $50
reimbursement which we believe the Administration's proposal advocates for all policies. In
fact, the application fee and the standard expense reimbursement would be fully justified as it
not clear how the loss adjustment costs would be covered for these policies.
Furthermore, the Subcommittee may wish to set a floor under protection at the 65 and
75 percent yield levels that is nearly equivalent with the 50/60 catastrophic policy in terms of
dollars or protection. While we need to provide farmers with a variety of coverage choices,
there is no need to offer less than is being given away for a minimum application fee.
NONSTANDARD CLASSIFICATION SYSTEM. There is much concern in many
areas of the country over the administration of the Nonstandard Classification System (NCS) and
its impact on farmers. We believe that the catastrophic level of protection should be a bottom-
end safety net for all farmers below which they should be forced to go under NCS or any other
program.
PROGRAM INNOVATION MUST BE FOSTERED. One of the most frequent
comments about the crop insurance program is that it doesn't provide enough coverage. We also
know of many farmers who currently buy MPCI whose first question about the reform proposal
is will it return to me the same level of benefits I am currently getting with both MPCI and
disaster payments. The answer to that question is no.
We understand some Members have expressed a desire to focus more of the buy-up
subsidy at the 75 percent, thereby reducing those premiums more. We would have no problem
with trying to do that provided the underlying risk costs are statistically derived. The Luveme,
Minnesota field hearing and other general comments from farmers and farm groups, revealed
that many people want subsidies targeted for the 85 percent level of coverage. While the
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Administration's bill provides that such levels of coverage may be offered, there are other means
for making the program more attractive that the Subcommittee may also want to explore that
may meet the same need expressed by farmers in a more economical way for all parties
involved.
One such alternative would be a type of supplemental product known as a "disappearing
deductible" or "accelerated payout" rider. This type of insurance endorsement would pay
farmers an increased indemnity amount per bushel as losses increased to the point if a farmer
had a total loss, they would receive an indemnity reimbursing them for 100 percent of their
APH. At what level of loss this accelerated payout is triggered and the rate at which it is
accelerated affect the premium for such policies. This type of benefit could provide current
MPCI users with the same level of benefits they currently get through crop insurance and
disaster payments combined. The premiums for such supplementals are significantly more
economical than the premium rates for 85 percent coverage.
The Federal Crop Insurance Act gives FCIC the authority to approve supplemental and
alternative products for reinsurance, expense reimbursement, and premium subsidies. Along
with the announcement of the Administration's reform proposal, FCIC announced it had finally
used this authority to approve one supplemental product on a pilot basis for 1994. We commend
FCIC for doing so and encourage this Subcommittee to encourage FCIC to be much more
proactive in this arena. Without reinsurance from the Federal Government on supplemental
products, they will not be made available on as wide a scale as is justified or needed. In its
exercise of this authority, FCIC also needs to set some ground rules to insure the timely
consideration, equitable terms, and widespread availability of alternative products. Also,
government reinsurance or other support of these products should be made available through
cooperative financial arrangements with a minimum of red tape and administrative burdens.
Given the proper incentives, reasonable opportunities for return on capital throughout the
program, and appropriate government backing, USDA and fanners would be amazed at
the explosion of crop insurance products that could be developed by the private sector.
REDUCTION OF THE PROGRAM'S ADMEVISTRATIVE BURDEN. Faced with
shrinking reimbursements to cover operating and administrative costs, most reinsured companies
have streamlined operations to the maximum extent possible. However, you reach a point where
your options for operational changes are limited by the program you are administering. That
is the point we have reached in this program. If we might borrow a term that many
Congressman are concerned with — we are facing a form of unfunded federal mandate. Like
the state and local governments, we are given ever- increasing mandates by FCIC with no money
to comply with these mandates. Companies end up being forced to spend limited resources on
crossing "i's" and dotting "t's" instead of on innovative new crop insurance products, improved
fanner services, and creative marketing to increase farmer participation.
There are a number of existing program requirements and paperwork burdens that will
remain in the reformed program that could be altered for the benefit of all parties involved in
the program without adversely affecting program integrity. We have a dual regulatory structure.
As you know, insurance regulatory matters are generally governed by state authorities and are
usually performance measured. While that system is not perfect, it does work quite effectively.
What we have been experiencing in the last few years is a second layer of federal
regulation of insurance functions that often appear more as regulation for regulation's sake and
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are not performance based. We are in favor of strong oversight. However, that oversight
should be: timely; cost effective; and carefijlly structured to achieve measurable performance
objectives. For instance, if there is a perceived problem with agents and adjusters, is the answer
requiring over 20,000 such persons to spend more hours in classroom training? Or is everyone's
time and money better spent identifying problem individuals and having a system to identify and
correct their performance or to disallow their participation in the program?
As we contemplate adding approximately 1.4 million participants to the program,
the streamlining and reduction of the administrative burden for FCIC, the companies, the
agents, and the participants, becomes even more vital. We have attached a list of suggestions
for the reduction of administrative costs which we believe warrant consideration. These
suggestions run the gamut from a simple requirement to require more timely releases of program
information to eliminating separate acreage reports to more refined data processing. Overall,
we believe that there could be a one-third reduction in the administrative requirements of
the crop insurance program without adversely affecting program performance. We hope
that the Subcommittee will seriously consider such a reduction as part of the reform
package.
APPLICATION FEE. While there is much debate about the level of the application fee
and its equity with respect to large and small producers, we do caution the Subcommittee about
locking specific rates into the statute. As you know, this approach minimizes the flexibility of
the Department to respond to changing conditions without having to ask Congress to amend the
statute. Perhaps the Subcommittee could strongly express its expectations with respect to these
fees in report language.
PROGRAM DELIVERY
We are in strong support of the Administration's proposed reliance on the private sector
for delivering all higher level coverage crop insurance policies. This maximizes the impact of
limited Federal dollars and recognizes the preference and convenience of farmers in obtaining
insurance coverage. The reestablishment of a goverrmient delivery system, however, causes
some problems that we believe need to be addressed to make the reform proposal work. We
believe the provision for dual delivery;
1. Could threaten the success of the reformed program;
2. Is unjustifiable in terms of cost and performance; and
3. Is inconsistent with both the current crop insurance statute and the reinventing
government initiative of the Clinton Administration.
We question the need for, cost effectiveness of, and farmer satisfaction with any govenmient
delivery.
NEED FOR COUNSELING. The catastrophic protection alone, which approximates
the benefits of ad hoc disaster programs of the past is good, but not sufficient to save the farm
for most growers when disasters occur. Therefore, the core issue that will determine whether
farmers are adequately protected is whether they do. in fact, purchase additional coverage to
meet their risk management needs. We strongly believe that professional counseling to
quantify risks and match them with the right insurance coverage is indispensable for this
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program to succeed. Private sector, professional insurance agents are trained, licensed, and
in place to perform that task as they do with all other consumer risk management needs.
For most growers, they will entrust the same professional insurance agent for their crop
insurance that they trust to help with their other farm insurance plans. These insurance
professionals often meet customers at their kitchen table and are able to develop a comprehensive
package of farm and crop protection. Government employees are simply not trained, nor should
they be, nor do they have the time to attempt to perform this essential duty.
Meeting the Counseling Needs of Farmers. At a minimum, we strongly suggest that
fanners' risk management needs could best be met if farmers are required to visit a private
insurance agent prior to their being able to obtain the catastrophic risk policy at an USDA
office. Being adequately covered is much more than filling out a form after standing in line at
the FSA office. It is a complex decision for which professional counseling should be provided
and which private agents are best positioned to provide.
UNJUSTIFIABLE COSTS. Budget constraints argue against the creation of a
duplicative infrastructure for the delivery of crop insurance. FCIC has already made the sound
decision to discontinue the writing of federal paper because over 93 percent of farmers who
choose to purchase crop insurance do so from private agents on private company policies. FCIC
realized it could no longer afford to have 24 percent of its resources and personnel devoted to
servicing only seven to eight percent of MPCI policies.
Government Involvement on Only an "As Needed" Basis. Due to the fixed costs of
a government infrastructure, serious consideration should be given to identifying areas of the
country in which there would be no backstop USDA delivery due to the presence and
commitment of sufficient private sector insurance forces that will see that every single farmer's
needs are met. Government availability of catastrophic coverage would only be needed to
address instances (if any) where private insurance agents are not available. This could save
hundreds of millions of dollars in government administrative overhead.
Delivery "Point" Versus Delivery "System". Another option to consider is that while
the USDA office may be a delivery point, the government need not develop a costly and
inefficient delivery system infrastructure to back that delivery point up. Rather, the policy
obtained at the USDA office could be serviced by the private sector infrastructure already in
place. We continue to believe that there are many administrative functions that FCIC is
mandated to not duplicate should such services be available in the private sector. Yet, such
duplication continues to occur.
REINVENTING GOVERNMENT. Finally, if we are serious about Reinventing
Government, then there is no better place to begin than the crop insurance program. First of
all, we are hitting the ground running because we already have a public/private partnership in
place. Secondly, we have an existing statutory mandate to utilize the private sector to the
maximum extent possible. 7 U.S.C. 1507(c). Thirdly, as USDA is reorganized and field
offices are consolidated and collocated, there is an existing private sector network that can
deliver crop insurance - and even the noninsured standby disaster assistance -- to farmers
more conveniently, more efficiently, and more cost effectively than government. We need to
capitalize on that opportunity.
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The capability of the private sector is illustrated by the fact that should Congress adopt
a reform proposal this year, the private sector can have it in place for the 1995 crop season —
meaning this fall -- while the government is still trying to determine who is in charge of what
as it deals with its reorganization and what types of computers to buy for FSA offices. Such
rapid implementation of a completely redesigned program can be accomplished, but it requires
major retooling costs that must be accommodated.
ADEQUATE DELIVERY EXPENSE REIMBURSEMENT. As you know. Congress
has made the determination that farmers will not pay any premium that is related to the costs
of delivering, servicing, or adjusting federally reinsured crop insurance protection. Therefore,
an integral part of the crop insurance equation is providing the means for covering these costs.
The administrative expense loaded into the premiums of most property and casualty
policies can run as higher than 40 percent of premium. While the expense reimbursement for
crop insurance used to be around 34 percent, it has dropped year after year as the operating
expenses and administrative requirements of the program have increased. The slashing of
expense reimbursement took on a new dimension last year as the Appropriations Committee
capped the rate at 31 percent in its annual funding measure -- a $10 million reduction in
reimbursements to the industry.
1993 proved that not only can the reinsured companies involved in the program lose
money on the risk sharing side of the private/public partnership relationship, but we also stand
exposed on the expense side as well. The expense reimbursement equation assumes that there
will be loss claims on approximately 35 to 40 percent of all policies. Most companies received
claims on as many as 90 percent of their policies in several Midwestern states last year.
Each year we find ourselves at the mercy of FCIC as they draft a Standard Reinsurance
Agreement (SRA) outlining the administrative and risk sharing requirements of the private/public
partnership that also sets the reimbursement rate. Despite ever increasing administrative
requirements and increased costs of doing business like anyone else, the reimbursement rate
declines (or stays at the capped rate of 31 percent for this year). This pattern is contrary to that
of the flood insurance program where private companies, who bear no risk in the program, have
received increasing expense payments.
There is language in the Federal Crop Insurance Act (hereinafter "FCIA") mandating that
private companies be reimbursed at "rates of compensation consistent with those generally
prevailing in the insurance industry" for functions performed. 7 U.S.C. 1507(c). However,
FCIC has always maintained that this language does not apply to standard delivery, servicing,
and loss adjustment functions. We believe the FCIA should be amended to make the prevailing
compensation rates applicable to all of the functions performed by the reinsured companies. We
are not asking for anything special, just something that reflects reality and brings this insurance
program in line with insurance practice.
There is also strong justification for some type of expense reimbursement supplement in
years like 1995 when the industry will have to undertake a significant retooling of all their
operations to accommodate a reformed program. Even in 1994, as this Summary of Changes
for Spring 1994 Crops, reveals, we were required to implement a number of significant changes
-- especially the new Acnial Production History (APH) requirements - that involved major
retooling while facing a five percent cut in our reimbursement rate. Finally, if FCIC makes
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changes midstream within a crop year, they should be encouraged, perhaps through statutory
language, to provide added compensation for these expenses which were not contemplated by
either party when entering the SRA.
A REASONABLE RETURN ON PRIVATE CAPITAL INVESTED. An integral part
of program delivery is having a healthy private sector available to provide the level of service
and competition that farmers want and deserve. The health of the private sector is greatly
affected in the crop insurance program by the risk sharing relationship it has with the
government.
As this Subcommittee heard from FCIC Manager Ken Ackerman at its earlier Washington
hearing, not only did farmers lose big in 1993, but the private reinsured companies did as well.
As alluded to earlier, we can assure you that not only did we lose on the underwriting side of
the program, we also lost on the administrative expense side due to the significant costs of
adjusting the record number of claims.
FCIC Manager Ackerman indicated company losses would be approximately $83 million
in 1993. To put that in perspective, some companies' losses in 1993 exceeded their
cumulative profits over the 10 to 13 years they have been involved in the program. The
industry as a whole lost in one year most of the 9-years worth of gains that GAO reported
in its January 1992 risk sharing report. Furthermore, given the very limited gain
oppormnities in the current SRA, it would take companies many years to earn back what they
have lost in one if they are given that opportunity by corporate executives and shareholders who
have other uses for their capital.
Current language in the FCIA states that:
"beginning with the 1992 reinsurance year ... the Corporation [FCIC] shall
revise its reinsurance agreements ... so as to require the reinsured companies
to bear an increased share of any potential loss under such agreement taking into
consideration the financial condition of the companies and the availability of
private reinsurance." 7 U.S.C. 1508(h).
FCIC has used this language with a vengeance and, despite the devastating financial impact of
1993 and the short supply of private reinsurance, is continuing to apply it so with the 1995
proposed agreement. An attached exhibit shows how the risk has increased over the last few
years and far outpaced the gain opportunity.
The Administration proposal includes some improvement in the above language, but we
believe it needs further refinement. The bottom line is that the opportunity for gain must be
commensurate with the opportunity for loss. As that same exhibit shows, that balanced
relationship does not exist in the current reinsurance agreements FCIC is offering. In fact, some
recent industry analyses have revealed that if a company placed all of its policies in the fund
where it can achieve the most gain and it bears 100 percent of the risk thereby having a right
to maximum gain, it would come out losing nearly seven percent over time.
One has to understand that in a program with a historical loss ratio of 1 .47, and one now
with a long range goal of an estimated 1 . 1 loss ratio, the rates and programs are such that they
build in a loss for companies. Therefore, the reinsurance relationship must be improved and the
FCIA should require a reasonable oppormnity for gain and should continue to take into account
the financial condition of the companies.
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PARAMETERS FOR COMPETITION PROVISION. A new element of the
Administration's proposal is one that would allow companies to reduce premium rates to farmers
based upon savings in administrative expense. While all such reductions must be approved by
FCIC, we believe some well-defined parameters need to be established to ensure that the farmer
benefits from this provision and is not penalized. As we have noted, the administrative burden
of this program is great, and while there are some requirements that we feel are unnecessary and
should be eliminated or streamlined, there are others that are central to providing farmers with
adequate servicing of their policies.
Therefore, strict controls are needed to ensure that any premium rebates are the result
of true efficiencies that do not adversely affect service to the farmer or program integrity.
Otherwise, the fanner will be on the losing side with fewer choices for insurance and less
service by those remaining providers.
ESSENTIAL QUESTIONS. Our judgment is that if all costs are capmred, the private
sector can deliver and service crop insurance policies more cost effectively and efficiently than
the government with both parties playing according to ffie^same rules. Therefore, we believe
the Members of this Subcommittee should demand to know the facts about the cost of delivering
this program through the government. There are a number of questions which if we were sitting
in your place, believe need to be answered:
1 . What are the costs of this government dual delivery system?
2. How much will it cost to train and license FSA employees across the country to
perform the tasks required of them under this?
3. If no additional funds are provided to ASCS or FSA to undertake this new
proposal then how much of existing resources are going to be diverted to
accommodate this? This would have to occur unless there is a significant amount
of over staffing or over fijnding currently in existence in the FSA system.
4. What will be the impact of this dislocation of resources on the current services
and responsibilities of ASCS and FSA to farmers across the country?
We believe these types of questions need to be fully evaluated.
OTHER ISSUES
There are a number of other issues regarding the reform proposal and overriding
administrative issues which impact the current and any reformed program which we also believe
are very important. To that end, we have included several attachments we feel the Subcommit-
tee should be aware of and which may assist you in making the decisions you will have to make
while formulating the crop insurance reform legislation. We look forward to providing the
Subcommittee with additional input as needed and requested.
CONCLUSION
We have a unique opportunity this year to drive the crop insurance stake deep into the
soil to ensure that the tent of protection for farmers will be able to weather the significant winds
of change facing agriculture in the years to come. The time for leadership is now. We believe
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the Administration has set before Congress a framework for reform that will work if refined and
implemented in a manner which capitalizes on the existing public/private partnership of the crop
insurance program. We cannot emphasize enough that this reformed program will only
achieve its objectives if everyone involved approaches it with a new mindset.
We firmly believe that the private sector can deliver, day after day, more bang for the
scarce federal dollar available, thereby permitting the intended beneficiaries - farmers ~ to
receive the bulk of those scarce dollars. We thank you for the opportunity to appear before you
today and look forward to working with you to insure the development and implementation of
an improved crop insurance program.
List of attachments:
Master List of Concerns With the Legislative Language
Cost of Government Programs for Disasters
Talking Points on Administration Proposal
Advantages of Private Sector Delivery
Agent Count by State
Comparison of Reinsurance Treaties
Increased Risk Requirements Under Reinsurance Agreements
List of Paperwork Reduction Ideas
Industry Joint Position Statement
Flow Chart on Administrative Expense Reimbursement Flow
List of Functions Performed by Reinsured Companies
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LIST OF POINTS/CONCERNS THAT NEED TO BE EXPLORED
1 . Program simplification/paperwork reduction language.
2. Rewrite levels of coverage:
a. 50/60 to 50/100 as first step;
b. cup on 65%;
c. full expense reimbursement on all buy-ups.
3. Clarify that catastrophic policies are written on a one unit per crop per county basis only.
4. Application fee options:
a. Take out specific amounts;
b. Per acre basis or some sliding scale;
c. Spread across all participants;
d. Fees for limited resource farmers ~ private reimbursed by govt.?
5. Delivery options:
a. Agent first;
b. Government only on an "as needed" basis;
c. Delivery point v. entire duplicative system.
6. Reasonable rate of return on private capital invested.
7. Reasonable expense reimbursement for adminsitrative and operating functions.
8. Establish some strict parameters for competition provision.
9. Establish reasonable and timely parameters for oversight.
10. Provide litigation support for protecting program integrity.
11. Alternative, supplemental, and optional insurance products:
a. Regulations/guidelines needed;
b. Test of private sector availability;
c. Must be a cooperative fmancial arrangement.
12. Encourage the increased use of private sector in program reviews, administration, and
development to avoid costly duplication.
13. Change substantial interest from 5% to the same definition in ASCS programs.
14. Reinstate cap on FCIC employment.
15. Insure that GRP can be offered only as an option to regular MPCI?
16. Require a thorough evaluation of the cost effectiveness and farmer utilization of GRP and
other pilot programs to determine whether they should be continued.
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Government Cost For Current Disaster Programs
(1981 - 1993 Estimates)
Dollars In Billions
CROP INSURANCE* DISASTER PAYMENTS
(1981 - 1992 Only)
Govt. Cost
Farmer Benefits
* Losses In Excess of Total Premium
These figures do not Include administrative expenses of any of the programs.
Premiums & Loss Payments
Multiple Peril Crop Insurance
Dollars in Billions
$1,800
1,600
1,400
I Total Premium I I Loss Payments
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TALKING POINTS ON THE CROP INSURANCE REFORM PROPOSAL
WHY NOW?
It is time for the dual and competing systems of crop insurance and ad hoc disaster
payments to come to an end both due to their budgetary costs and to the "disaster" (too
little too late) which ad hoc disaster payments are to farmers.
We have seen in recent months the difficulty of "finding" disaster funds and the
increasing movement to subject them to PAYGO. This proposal reigns disaster funding
in and eliminates the authority for future non-PAYGO ad hoc payments, while at the
same time providing farmers with the certamty of having some type of base level
assistance in the event of a disaster.
It is in the long-term best interest of our agricultural sector to undergird it with a stable,
fully funded, safety net for risk management to handle the unpredictable risks which that
sector, and no other, is susceptible to year in and year out.
WHY A CROP INSURANCE APPROACH?
President Clinton and Agriculture Secretary Espy have recognized the superior attributes
of an insurance solution to disaster situations over an ad hoc "throw money at the
problem after the fact" solution by adopting a crop insurance solution as the primary
means of disaster assistance for the future.
Crop Insurance:
Is a plan that facilitates
business planning.
Represents true risk management.
Can be used as collateral for
increasingly important ag
financing.
Encourages self-reliance and
responsibility. Farmers help
themselves.
Allocates loss costs to those
who properly should bear them.
Encourages people to reduce
premiums through loss prevention
and risk avoidance, thus lowering
overall costs to society.
Exposure is measurable and can
accounted for in underwriting
adjustments.
Ad Hoc Disaster Assistance:
Is unpredictable, ad hoc, inconsistent
with planning.
Represents no management whatsoever.
Cannot be used to backstop financing.
Encourages dependence.
Flies in the face of equity.
Discourages risk management.
Exposure is unknown and cannot be
accounted for or regained.
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THE ADMINISTRATION'S PROPOSAL REFLECTS:
Truth in budgeting -- Over the past six years the Federal Government has expended
$1,575 billion annually on ad hoc disaster payments in addition to approximately $900
million on crop insurance, a portion of which is paid by farmers. The Administration's
proposal recognizes this budget reality, it puts an end to the authority to handout such
funds in the fumre widiout paying for them, and it conservatively shifts $1 billion
annually to the crop insurance program.
Savings to taxpayers ~ The dual system of ad hoc disaster plus crop insurance over the
past six years has cost American taxpayers approximately $2.4 billion a year. The
Administration's proposal according to 0MB would cost $8.1 billion over five years or
approximately $1.62 billion/year. This is a savings of $780 million/year or $3.9 billion
over five years using actual disaster expenditure figures for the past six years!
Even using the conservative $1 billion in disaster expendimres from the 10-year average,
0MB 's estimates show a five-year savings of $750 million. If CBO's scoring of the cost
of the reform proposal is used with OMB's $1 billion added in the baseline, taxpayers
would still show a savings of $350 million over five years!
Improved risk management options to farmers - For the many reasons outlined above,
crop insurance is a far superior means for addressing disasters than ad hoc payments.
Insurance improves farmers' ability to obtain financing and manage weather as well as
market risks. The increased incentives in the package for additional levels of coverage
will help insure a wider number of farmers are adequately protected.
Utilization of the private sector in partnership with government - The private sector now
delivers and services over 93% of all federal crop insurance in the U.S. Farmers prefer
dealing with private agents and companies and FCIC has already decided to phase out
federal paper for 1995. The private sector provides a number of advantages that reduce
government costs, improve farmer service, and avoid duplicative delivery infrastructures.
The reform proposal builds on these concepts. However, it may need to go further and
utilize the private sector to the maximum in concert with the Reinventing Government
initiative.
Good public policy - Providing for the risk management protection of America's food
and fiber production system is vital to the survival of that sector of our economy and to
the continued availability of the world's safest and cheapest food suppy. Risk protection
becomes increasingly important due to the fact that risks increase as farm program
supports decrease, and that decreasing trend is virtually unstoppable. It is in the public's
interest to maintain this system in a planned, budget accountable manner. The
Administration's proposal does this. In addition, the choice of a insurance solution is also
the best policy choice.
Without the Ml funding, the Administration's reform proposal will not be able to accomplish
the goals necessary to provide American producers of food and fiber with the risk management
protection they need and deserve at a cost that American taxpayers can afford to bear.
81-128 0-94-11
316
ADVANTAGES OF PRIVATE SECTOR MPCI DELIVERY
* Local agents are in position in the local communities where the farmers are, they are
known, they are trusted, they are experienced, they are licensed.
* Farmers have had a choice between direct government policies and reinsured private
policies, they have chosen private policies — 92% private; 8% government.
* Rural communities are dependent on the jobs and associated economic activity created
by a privately delivered crop insurance program — some 68,000 private sector
individuals receive all or a part of their income from the sales, service, and adjustment
of Federally reinsured, privately delivered, crop insurance. Many of these people are
farmers themselves.
* Farmers don't have to wait in line to get their crop insurance. The agent often comes
to them, agents have evening and weekend hours.
* Agents and companies already have established relationships with over 700,000
policyholders.
^ Reinsured companies have increasingly put their own money at risk in the program and
compete against one another. This creates the incentive to do the job right from sales
through adjustment. It has improved program loss ratios and cut down on claims errors.
* Reinsured companies invest added money in the program through the development of
alternative and supplemental products which provide farmers additional means to
sufficiently manage their risks.
* The creation of a government infrastructure sufficient to make the sales and perform the
service necessary to achieve the levels of participation being called for would be
enormously expensive and would have to be paid whether the objective was achieved or
not.
* Reinsured companies and local insurance agents only get paid if they deliver. No sales,
no cost. This provides the incentive to them and saves the government money.
* Not all farmers participate in government programs, while they may purchase and need
crop insurance.
* Even free coverage should be delivered by the private sector in order to seize the
marketing opportunity to sell fanners the higher levels of coverage necessary to
adequately manage their risks and avoid requests for disaster assistance.
* With a more stable program, private companies could do even a better job in efficiently
delivering crop insurance. Annual instability affects hiring, strategic planning, long-term
planning. Mid-year changes significantly affect operational efficiency.
NOTE: These advantages have proved themselves through the tripling of farmer participation
in the program since delivery was largely turned over to the private sector.
317
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SUMMARY OF PAPERWORK REDUCTION mEAS
1. Timely and Predictable Release of Program Information
Crop program information and the corresponding actuarial materials are often not
released in time for companies to perform strategic planning for such items as internal training,
agency training, and proper marketing of the crop insurance program. The program information
and actuarial materials need to be in the hands of the companies six months in advance of the
sales closing date for the crops affected.
2. Tolerances for Acreage Modifications
After the acreage reporting date, any change in acreage, regardless of size, results in
modification to the policy and reissuance of some policy paperwork like the declaration page.
If the revision is upwards, an inspection will also have to occur. Tolerances should be
established such that acreage can change within tolerance, without requiring inspections and
reissuance of policy paperwork.
3. FCI-5 Agreement
Eliminate the insured signamre portion for the application for coverage (FCI-5) so the
company or the agency is authorized to make the request. The insured must sign the resulting
offer of insurance (FCI-2) anyway, making the signatures on both forms duplicative and
requiring an extra trip for the insured or the agent.
4^ Wetlands ACT
Different approaches are used by different county ASCS offices in verifying compliance
with Sodbuster/Swampbuster. All ASCS offices should have the capability to print, based upon
written request, copies of a producer's ASCS Form 424 and all offices should use the same
system of verification. In addition, the insured must also sign a disclaimer at the time of
processing a claim that they remain in compliance with Sodbuster/Swampbuster. ASCS and
FCIC should develop an interactive database to streamline this whole process.
5. Minimum Premium
Institute a minimum premium as is done for Crop Hail policies. Companies must process
policies with premiums as low as $1.00. It takes virtually the same time and effort (hence costs)
to process small premium policies as it does large ones.
6. Data Reporting Requirements
We must electronically transmit 12 different records types, 250 bytes each, with a total
of 485 data fields. Duplicate information is being processed by the FCIC and the insurance
companies. We need to eliminate insignificant data, consolidate multiple records into one record
group and/or group redundant data and send only once.
7. Educational Requirements
We must furnish agendas, copies of tests, handouts and various other materials to
compliance auditors aimually to support our training programs. In addition, we also must
321
provide at least 24 hours of classroom training to each adjuster. Each company should be able
to provide compliance auditors with the above data for approval of our training programs one
time and not on an annual basis unless they have changed. Also, the company should be able
to determine the number of hours of training each individual needs, based upon observation and
not some arbitrary requirement.
8. High Risk Land Rating Procedures
This is currently a manual rating procedure as the FCIC does not have an automated edit
in place. In its present state, someone must physically review a map to determine if a
policyholder is insuring high risk land. This is very time consuming and inefficient, as the maps
are not easy to read, which can result in improper classification. The FCIC itself does not
currently have an automated edit in place for high risk land. This means the only time potential
high risk land locations are reviewed is in the event of a compliance audit. Obviously, the
opportunity for high risk land to be improperly rated and never corrected is great.
FCIC should develop a database of high risk land locations that the insurance companies
can load into their systems. This would provide an efficient automated method in which to
identify high risk land locations and then rate accordingly.
9. APH & Acreage Reports
Both APH and Acreage reports are required separately and at different due dates thereby
resulting in the file having to be handled twice for information that could easily be provided all
at one time. The due dates for both of these pieces of data should be the same, and the data
should be reported on the same form.
10. Missing Acreage Reports
Insureds may choose to not file an acreage report and try to get out of a policy if they
perceive conditions to be good at that point in time. If the company wishes to determine
whether in fact a crop was planted and the acreage, they must absorb the costs of having an
adjuster visit the farm. The company should have die latitude to cancel the policy for non-
performance or contract with an adjuster to have an inspection done at the expense of the
insured.
11. Obtaining ASCS Established Yields
On many units, ASCS program yields are required to either establish or complete the
APH database It is the insured's responsibility to provide this information by the production
reporting date. There should be a minimum county established yield that could be used when
the insured does not provide one. This yield would need to be low enough in order to provide
an incentive for the insured to obtain the ASCS established yield. Another option to facilitate
this process would be to allow the companies to obtain the ASCS established yield via a
documented phone call to the ASCS office without hardcopy documentation.
12. Handling Requests to the Regional Service Office
In several situations, the company is required to obtain information from the Regional
Service Office, called written agreements, in order to write and service a policy. A tew
examples of this would be crops that do not have a rate esublished m the county, for obtaimng
322
the determined yields on category C crops and for determining a classification if one is not
published on peanuts and tobacco. The companies should be given the necessary authority and
training, under established guidelines, to administer the situations that require written
agreements.
13. Consolidated loss adjustment forms/process.
We would request that ASCS and insurance companies develop one complete source
document that would be used for loss adjustment purposes. The form would include line item
legal descriptions, acreage, share, practice, intended use, compliance with
sodbuster/swampbuster, established yield and any other pertinent data. The next step in the
process would be automation that would allow companies by computer modems to access this
information. Companies could then dial up and request this for insureds with losses and print
the data in their own offices.
14. ASCS Paperwork re losses
The current forms, systems, and practice between crop insurance and ASCS as it relates
to losses and several program items are totally inefficient and wasteful. Greater coordination
and discipline needs to occur. There needs to be one set of rules that everyone must follow.
323
AACI CIRB NCIS
PIA IIAA
I BAA
JOINT POSITION STATEMENT ON CROP INSURANCE REFORM*
The Objective of Crop Insurance:
The crop insurance program and, therefore, any reform of it, must provide farmers with
incentives and oppormnities to adequately and affordably manage their production risks. This risk
protection should meet farmers' most basic income and fmancial needs if a natural disaster strikes.
Measurement of That Objective:
The success of a government-assisted crop insurance program should be measured by the extent
to which it: (1) encourages farmers to get the most risk protection per dollar of government and private
money expended; and (2) eliminates the need for ad hoc disaster assisunce.
Achievement of That Objective:
Reform of the crop insurance program must build upon the underlying framework of the much
improved existing program. That framework includes individualized protection based on actual
production history delivered by the private sector. A reformed program should treat those farmers who
currently take the initiative to manage their own risks through crop insurance fairly, and it certainly
should not penalize them. The crop insurance product itself must provide adequate protection at an
affordable price. ' • -"
By itself universal availability of a catastrophic level of coverage at little or no charge will not
be sufficient. Significant participation at greater than catastrophic levels of protection is necessary to
adequately protect farmers and replace ad hoc disaster assistance. Only through a continued significant
involvement of the private sector in the risk bearing and delivery of crop insurance can Federal dollars
be leveraged to meet these objectives in today's budget environment,
ELEMENTS OF A REFORMED CROP INSURANCE PROGRAM:
(1) Fliminate Ad ¥nr Disaster Payments. Multiple peril crop insurance (MPCI) must be
established as it was intended to be in 1980, as the sole mechanism for delivering disaster
assistance to farmers. This cannot be achieved without removing the authonty for ad hoc
disaster assistance. As long as the possibility of such ad hoc assistance exists, many agricultural
producers will not take the steps necessary to manage their risk through crop insurance. The
Federal Govemmem's liberal provision of ad hoc assistance in the past decade has hindered the
success of the crop insurance program and greatly increased the taxpayer costs of assistmg
farmers in times of disaster. The monies that have historically been expended on ad hoc
assistance should be transferred to the crop insurance baseUne to fund improvements in and
increased availability of that program. Any type of permanent disaster program established
for crops not currently covered by MPCI should include a private sector delivery element.
* Developed prior to the release of the legislative language.
324
Joint Position Statement
(2) Universally Available Catastrophic Coverage. We support the provision of some catastrophic
level of crop insurance at little or no charge if that coverage is structured and delivered in a way
that will enhance the incentive for farmers to acquire increased protection which is adequate to
meet their true risk management needs. This coverage should be delivered exclusively by the
private sector. The catastrophic coverage should be a standard MPCI policy that is otherwise
the same as a higher coverage level policy so that it may be incorporated easily into a single
policy providing higher coverage. I.e., coverage should be on an individualized farm basis
using actual proven yields, whenever yield records exist. This would reduce farmer confusion
and facilitate the purchase of additional protection.
(3) Exclusive Private Sector Delivery. Maximum participation of farmers at optimum levels of
insurance protection can best be achieved through the use of reinsured MPCI products and one
marketing and service system — the private sector. There should be no government delivery
nor any Sales and Service Contractors (Master Marketers). This extends to the catastrophic level
of coverage as well. The local agent will be the one-stop shop for crop insurance, or in many
cases will go to the farmer to make the farmer's home the point of sale. The government can
not afford nor should try to duplicate the tens of thousands of people comprising the current
private sector crop insurance sales and service force. Exclusive private delivery would also
capitalize on the existing relationships with nearly 700,0CX) policyholders. Direct FCIC policies
and the infi^stiucture accompanying them should be eliminated.
(4) Each Farmer On Record As Insured Or Waivine Coverage. The FSA Office should distribute
a certificate to each participant of record several months before the crop insurance sales closing
date entitling them to a certain level of insurance coverage and verifying their eligibility for
insurance. The certificate would double as a statement which the farmer would sign and return
to the FSA Office if they chose not to insure themselves with any catastrophic or other level of
coverage. That statement would indicate the recipient had: 1) been offered the catastrophic and
any other coverage; 2) understood that this was the limit of what he or she could expect from
the government in the event of a crop disaster, and 3) declined to participate. Each farm
program participant should either be insured or have a signed statement on record. Farmers who
do not participate in any farm programs involving the FSA office could receive the same level
of insurance coverage by contacting an insurance agent without the need for a certificate.
(5) Separate USDA Risk Management Unit. A reorganized Department of Agriculture should
contain a unit with adequate and experienced staff fiiUv devoted to the management of the crop
insurance program and standby disaster program for uninsured crops. FCIC should create a
reinsurance division staffed with personnel with experience in the insurance or reinsurance
industry. As a laboratory for reinventing government. FCIC should explore turning over a
number of program functions to the private sector in accordance with guidelines established by
FCIC.
(6) Government Must Continue as a Reinsurer. The government must continue to provide
catastrophic reinsurance to the private sector on all approved policies. An appropriate and
equitable blend of risk sharing between private insurance companies and the government should
be considered for all levels of coverage.
325
Joint Position Statement 3
(7) Permanent Joint Task Force. A pennanent FCIC/Industry Task Force should be established for
the purpose of providing a mechanism for a continuing working dialogue on program issues be
they one-time or ongoing (i.e., high moisture com, quality adjustment in general, APH, expense
reimbursement, risk sharing, new products, etc.). The Task Force would include reinsured
company representatives, agents, adjusters, and government agency representatives and would
operate on a roll-up-the-sleeves cooperative philosophy. Such a group could help reduce
administrative costs substantially by heading off practical difficulties of various proposals early
in the process and certainly prior to implementation.
(8) Approve Alternative and Supplemental Policies. The existing authorities for FCIC to approve
alternative and supplemental policies and to undertake pilot programs with different types of
insurance coverage should be retained and fully utilized.
(9) Provide Fair and Adequate Expense Reimbursement. Congress has made the commitment to the
private sector delivery of crop insurance as the most cost efficient method of increasing
participation and thereby spreading the risk. If the government continues to pay the
administrative and operating costs associated with the sale of crop insurance, whether loaded mto
the premium or paid separately as it is now, then this reimbursement should be based on the
reasonable costs of delivering the program. It must be recognized that those costs increase as
the administrative requirements imposed under the program and ordinary costs of domg business
increase If the government decides not to pay these costs, then the prohibition on loading these
costs into the premium must be removed and very strict guidelines established to insure umform
and high-level standards of service to policyholders.
(10) Reduce Administr..ivp Costs of Program. FCIC should conduct a thorough review, in
cooperation with the private sector and farm groups, of the paperwork burdens of both the
current and any reformed program. Steps should be taken to reduce those burdens and
streamline, simplify, and computerize the administration of the program.
(11) F^tahlish a Catastrophic Ia)ss Fund. A catastrophic loss fund, perhaps by state, by crop, should
be established to fund widespread disasters to avoid the need for large premium rate increases
following widespread disasters.
(12) A Competitive Private Sector. In the interest of competition, the program should be crafted to
encourage participation of both small and large companies as risk bearer
(13) ron.innPd Propram Reform. FCIC should not let reform happen without continuing to address
various aspects of the current and reformed program that remain areas of recumng problems.
FCIC should thoroughly review premium rates on a county by county basis to remove existing
anomalies. The rates of a reformed program should reflect the nsk exposure of the new
program rather than the past program.
American Association of Crop Insurers (AACI)
Crop Insurance Research Bureau, Inc. (CIRB)
National Crop Insurance Services (NCIS)
Professional Insurance Agents (PLA)
Independent Insurance Agents of America (IIAA)
Independent Bankers Association of America (IBAA)
326
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NATIONAL CROP INSURANCE SERVICES
7301 CXXIEGE BOULEVARD. SUITE 170
OVERLAND PARK. KANSAS 66210
Testimony given to
U.S. House of Representatives Committee on Agriculture
Subcommittee on Environment, Credit and Rural Development
by Robert Parkerson, President,
National Crop Insurance Services.
April 21, 1994
National Crop Insurance Services (NCiS) has been serving the crop insurance industry,
in one form or another, since 1915. Our organization has continuously evolved over the
years to meet the changing needs of crop insurers.
We were organized for three primary purposes: 1) to gather and analyze crop statistics
so that appropriate premium rates can be developed; 2) to develop standard policy terms
and conditions so that agents and consumers need to understand only a few basic
program options; and, 3) to develop loss adjustment methods and adjuster training to
support the appraisal of crop damage so that losses can be settled fairiy.
NCIS has the professional staff, experience and organization to support the increasingly
sophisticated risk management needs of farmers. The services of NCiS help insurance
companies position themselves to meet the needs of the farm community.
Industry applauds the Refomn effort to explicitly recognize past off-budget expenditures
on ad hoc disaster programs and incorporate those expenditures into the budget for crop
insurance. The following is our written testimony addressing the twelve items mentioned
in Chairman Johnson's letter of April 8, 1994.
329
Adequacy of Premium Subsidies: This is a complex issue. The Refomi Act
requires actuarially sound premium rates and sufficient premium subsidy to attract
farmers to purchase buy-up coverages. If the underlying rate structure is
inadequate, then premium subsidies which are uniformly applied across the
country will result in adverse selection in improperly rated areas. Catastrophic
premium subsidy is most likely adequate since loss ratio experience at 50% level
coverage is acceptable. However, the subsidies at higher coverage levels must
take into account the actuarial history of state/crop combinations with unfavorable
experience. At current MPCI rates, several state/crop combinations, such as
Midwest com and soybeans, appear actuarially sound. Wheat and cotton
experience in various states is not satisfactory. Several minor crops also have
unfavorable loss ratio experience. The private industry, with our historical
experience and knowledge of crop insurance rating, would be willing to participate
more actively with the FCIC in resolving this complex issue.
Processing Fee: The processing fee of $50 per crop per county (maximum of
$100 per producer) would probably cover minimum enrollment requirements.
However, establishing an individual APH database, processing acreage reports,
perfonning mandatory inspections and ensuring other USDA program compliance
would cost more than the suggested $50 processing fee. For example, in 1 992
there was approximately $760 million of gross premium. At an administrative
expense reimbursement of 26% (31% less loss adjustment expense of 5%) and
approximately 689,000 policies with premium, the average enrollment and
processing cost per policy is estimated at approximately $280. ASCS/FSA will
also incur the same basic costs as industry.
Mandatory Linkage: Mandatory linkage, although not desirable in an insurance
program, would provide the necessary program participation in order to make crop
insurance a more workable system. The habitual practice of ad hoc disaster
payments provides a tremendous disincentive for farmers to seriously consider
crop insurance enrollment as a much needed risk management tool (see
GAO/RECD-92-25 Crop Insurance).
Dual Delivery: Industry has indicated a willingness to wori< with USDA for dual
delivery but additional government costs will be incurred. Initially, the private
sector's delivery systems (computer systems, manuals, training, and staff) will
have to be duplicated for ASCS/FSA delivery. This will be a tremendous start-up
cost to the government. In the long run, it may cost the same or more to deliver
MPCI through ASCS/FSA as through the current delivery system. Currently,
private sector delivery is a variable cost to the govemment. Under dual delivery,
certain crop insurance program costs would become a higher fixed govemment
expense.
Actual Production History: Industry and FCIC have jointly wori<ed on the
improvement of the APH process. Four-year modified APH is the most recent
attempt to meet the risk management needs of the American farmer and
simultaneously achieve actuarial soundness. Modified APH encourages farmers
330
>v
to provide their own records which should result in better individualized coverage.
Several years of experience are needed before this system can be property
evaluated. Thus, only minimal changes should be considered until sufficient data
has been obtained.
6. Noninsurable Crops: Enrollment and processing will be a major hurdle at first.
In the long run, government will be in a better position to determine the risk
exposure of the agricultural production sector and provide the necessary resources
required to manage the system. As experience data and information become
available, noninsurable crops can be incorporated into the existing MPCI program.
However, careful screening criteria should be in place before transferring
noninsurable crops to the insurance program.
7. Likelihood of Ad Hoc Disaster Assistance: Present budget pressure and the
language contained in the Refomn Act would suggest the likelihood of future
disaster assistance is small. Historically, assistance has been routinely provided
and the credibility of the crop insurance program has been seriously damaged.
Industry stands opposed to the provision of ad hoc disaster assistance if crop
insurance is to be a viable risk management tool for the American fanner.
8. Expense Reimbursement Formula: When establishing rates for other lines of
insurance, state regulators typically allow an allocation for expense of doing
business, provision for underwriting gain, and the loss component of the rate.
Currently, FCIC provides an administrative expense reimbursement to the
company and a subsidized loss component of the rate to the farnier. There is no
formal provision for an undenwriting gain in the current program other than the
portfolio management of the Standard Reinsurance Agreement (SRA). In the past
several years, the administrative requirements of the program have increased
substantially without any consideration of the additional costs imposed on
companies.
9. Competitive Rating: The social dimension of the program coupled with FCIC's
control over the actuarial and underwriting functions do not make competitive rating
a prudent practice for the industry at this time. At an historical loss ratio of 1 .47
(not including 1993 experience which is presently at 2.18), it is unclear at this time
how the competitive rating provision to lower the rates charged to farmers would
be consistent with the targeted loss ratio of 1.10. Suggesting that companies
lower the rates charged to farmers would also be inconsistent with concerns over
solvency in our industry as well as other lines of private insurance. Competitive
rating could jeopardize companies' fiduciary responsibility with the private
reinsurance community. The existence of private reinsurance is a critical
component of the private delivery system. Private reinsurance represents a
sizeable cost savings and transfers substantial risk from the government to private
industry. Private companies must have a reasonable opportunity for gain to attract
the necessary capital to support the program.
331
10. Non-Standard Classification System (NCS): NCS is an important first step in
corectly underwriting individual insureds who are potentially abusing the program.
The system has been modified to correct for area wide disasters but further
improvements are still required. Only 3.6% of insureds are cun-ently impacted by
this program.
1 1 . Group Risl< Plan: Although the GRP may achieve certain public policy goals and
may have a place in covering certain noninsurable crops, it is not based on
standard insurance principles and practices. GRP has met some resistance from
state regulators and consumers. Industry has expressed concems to FCIC over
the rating and implementation of this progreun.
12. Marl<et Value Protection Plan: The MVP program represents a breakthrough in
allowing private industry to introduce creative solutions to meet the risk
management needs of producers. The MVP product combines both yield and price
risk. MVP better enables the fanner to manage his risk by using the martlet to
provide a price for his crop that may not be possible at harvest-time. The
combination of MPCI/MVP allows the farmer to fully fonward price his production
with insurance protection. We encourage FCIC to continue to wori< with private
industry to find other ways and solutions to meet the changing risk management
needs of America's farmers.
332
Crop Insurance Research Bureau Inc.
9200 Indian Creek Parkway, Suite 220 • Overland Park, Kansas 66210-2008
Tel (913) 338-0470 • Fax (913) 661-1640
Testimony of
Thomas A. Rudisill, CPCU, Chairman
Crop Insurance Research Bureau, Inc.
Overland Park, Kansas
Before the Subcommittee on Environment, Credit and Rural Development
Committee on Agriculture
U.S. House of Representatives
Regarding the Federal Crop Insurance Program
April 21, 1994
Mr. Chairman, the Crop Insurance Research Bureau, Inc., ("CIRB") is a national
trade association representing 34 companies that provide multiple peril and crop hail
insurance to the nation's farmers. I appreciate the opportunity to share with the committee
our views on the future direction of the Federal Crop Insurance Program, and particularly,
our thoughts on H.R. 4217, the Administration's crop insurance reform proposal put forward
by Secretary Espy last month.
Coupled with the positive changes put into the program last year through the budget
reconciliation legislation. Secretary Espy's proposal gives us a measure of hope that for the
first time in recent years, we as private insurers can get on with what we do best - providing
a comprehensive risk management tool to the agricultural producers of this country --
without continually looking over our shoulders for the specter of federal ad hoc disaster
payments. Conceptually, the Administration's reform proposal is acceptable to us, but there
are a number of bothersome aspects that must be addressed before it can be successful.
333
For many years, CIRB has actively supponed an actuarially sound federal crop
insurance program, delivered by the private sector and backed with federal catastrophic
reinsurance. We believe that the involvement of both small and large risk-bearing entities
is critical to its success. In addition, CIRB strongly supports private crop-hail insurance and
opposes any legislation that might negatively impact this successful insurance product.
Finally, CIRB has long supported the elimination of Congressionally-authorized ad hoc
disaster payments because as has been painfully demonstrated over the past six years, from
both a policy perspective as well as a fiscal standpoint, crop insurance cannot co-exist with
ad hoc disaster payments.
While we clearly have concerns with some portions of the Secretary's proposal ~ such
as the continuation of the dual delivery system, the appUcation of individual yields and
actual production history on the low-level catastrophic coverage and the ability of our
companies to adequately service producers who choose only the low-level coverage option -
- we are cautiously optimistic that CIRB companies could operate under this new system.
We pledge to work with you and your subcommittee to insure that the final legislation both
provides producers with the risk management options they need and allows our companies
to provide the tools to achieve that goal - at an affordable cost to the American taxpayer.
Two components critical to the success of this proposal are the willingness of
Congress to forgo future ad hoc disaster payments and full funding of the federal crop
insurance program through the shifting of $1 billion annually from off-budget disaster
spending to the crop insurance program. In the face of a continuing real decline in federal
farm program expenditures, providing risk protection through crop insurance is the most
responsible public policy option. Given the many problems associated with applying the
"Pay-As-You-Go" requirements of the Budget Act to disaster funding, moving a portion of
334
the money on-budget to fully fund the crop insurance program makes good sense. However,
without full funding of this program, it will have little chance of success. The funding issue
is the key element of this proposal. If this legislation were to become law without sufficient
funding, it would place the crop insurance program in imminent danger.
Mr. Chairman, you and the members of your subcommittee have voiced strong
support for an end to the current schizophrenic two-track insurance versus disaster system
and we urge you to continue your support.
I would now like to highlight a few of CIRB's specific concerns with the Secretary's
crop insurance reform proposal:
• Dual Delivery System - While the goal of the proposed
legislation is to eliminate ad hoc federal disaster payments and
to encourage producers to actively manage their risks, the Farm
Service Agency may not be the best source of information to
allow producers to best assess their true risk management
needs. Should a dual delivery system be created. Congress must
insure that FSA employees are adequately trained. Without a
clear understanding of the various insurance options available,
serious problems could arise if a disaster strikes and only a
minority of producers "buy up" to the 65% or 75% level of
coverage. We prefer to see producers come to professional
insurance agents, who are well prepared to explain these
various insurance options and provide quality service after the
sale.
• Actual Production History - As we understand the Secretary's
proposal, actual production history ("APH") would be required
both for the catastrophic level as well as for higher coverage
levels. Given the time and paperwork required to provide and
report that information, for the sake of reducing cost and
complexity, catastrophic coverage should be based on the ASCS
yield as adjusted by FCIC (T-yield).
• Effective Date - The Secretary's proposal calls for an effective
date of the crop year immediately following approval of the
Act. Should this proposal become law in the next few months,
both private companies and FCIC would be under tremendous
pressure to make the new product available for this fall's crops.
Given the importance of this initiative and the amount of time
335
and effort spent to develop this proposal, the effective date
should be postponed to insure that federal employees are well
trained and that companies and agents have the materials
necessarj' to make this program succeed. An artincially
expedited start-up date could become a disaster in itself.
• Flexibility in Required Risk Retentions - The Secretary's
proposal requires reinsured companies to bear a sufficient share
of any potential loss ... so as to insure that the reinsured
company will sell and service policies of insurance in a sound
and prudent manner. However, the proposed 1995 SRA will
make it extremely difficult, if not impossible, for a number of
private providers to continue their participation in the program.
This in turn, will take away an imponant element of choice for
producers. As companies agree to assume increased risk of
loss, there must be a commensurate potential for profit in a
program actuarially based on a loss.
• Catastrophic Expense Reimbursement - For the catastrophic
level coverage, the Secretary's proposal provides for a $50 -
$100 processing fee, and in the event of a loss, $150 to adjust
the loss. The required effort on the part of the agent coupled
with the true cost of adjusting the loss will likely relegate
virtually all of these "catastrophic - only" contracts to the
federal government.
In summary, Mr. Chairman, CIRB supports the efforts of this subcommittee and
those of Secretary Espy to rationalize the risk protection functions of the federal crop
insurance program. We believe that the Congress has a golden opportunity this year to
make this program work for both producers and taxpayers. The participation of national,
regional and single-state operations is essential for the crop insurance program to grow and
improve. The private sector simply must have the opportunity for a fair return. A fair 1995
SRA coupled with the best aspects of crop insurance reform will assure continued private
sector involvement.
As you and your staff work through the complexities of this proposal, I would like to
offer you the expertise of the many experienced crop insurance specialists from our member
companies as we work toward our common goal. Thank you.
336
April 19, 1994
The Honorable Jim Sasser
Chairman, Senate Budget Committee
United States Senate
Washington, DC 20510^
Dear Chairman Sasser:
f
In your role as Chairman of the Senate Budget Committee, the undersigned organizations and
the thousands of farmers and ranchers we represent urge you to fully fund the
Administration's budget request for its crop insurance reform proposal during your
conference on the Fiscal Year 1995 Budget Resolution. While we may not all agree on
every detail of the proposal and will be working to improve the package, we stand
unanimously behind the provision of funding for the package and believe that it warrants
your support.
In standing behind the fundamental concept of providing a low level of catastrophic coverage
to all farm program participants, we are taking a bold step which many of us have previously
been unwilling to take. However, given the continued budget pressures facing all
government programs and the policy reasons favoring an insurance approach to disaster
relief, we believe the time is right for change and for committing to a single predictable
approach to disaster relief.
The Administration's approach reflects truthful budgeting, budget discipline, good public
policy, improved risk management options for farmers, and reduced costs for taxpayers. The
$1 billion being requested is actually conservative due to the fact that over the last six years,
ad hoc disaster bills have cost the American taxpayer $1.^75 billion annually. We believe
the House Budget Committee took a historic step by providing approximately $3 billion in
additional funds for the crop insurance baseline. We hope that the conference committee will
lend its leadership to this effort by providing the full Administration request of $4.5 billion
over five years.
Thank you for your consideration of this issue. We look forward to the Conference
Committee's positive action on this proposal.
Sincerely,
American Agriculture Movement
American Soybean Association
National Association of Wheat Growers
National Com Growers Association
National Cotton Council of America
National Farmers Organization
National Farmers Union
U.S. Rice Producers Group
cc: House and Senate Budget Conferees
337
?
AMER^Q^ /laBCJOATION OF NURSERYMB^
1250 I STREET. N.W. / SUITE 500 / WASHZNGTON, D.C. aOOOS / 208/788-2800
TESTIMOKY
Before the
UNITED STATES HOUSE OF REPRESENTATIVES
COMMITTEE ON AGRICULTURE
SUBCOMMITTEE ON ENVIRONMENT, CREDIT, AND RURAL DEVELOPMENT
April 21, 1994
Mr. Chairman, and Members of the Subcommittee, the American
Association of Nurserymen (AAN) welcomes this opportunity to
present the nursery industry's views regarding legislation to
reform the federal crop insurance system.
BACKGROUND
Founded in 1875, AAN is the national trade organization of the
nursery industry. We directly represent approximately 2,300
growers, landscape professionals, garden center retailers and
horticultural distributors. Through the membership of our state
and regional nursery and landscape associations, AAN represents
an additional 16,000 family farms and small businesses in the
nursery industry.
ECONOMIC STATURE OF NURSERY INDUSTRY
According to USDA's Economic Research Service (USDA-ERS) , the
nursery and greenhouse industry continues to outpace other
agricultural sectors in cash receipts. Nursery and greenhouse
crops totaled an estimated $9.0 billion in 1993 — representing
nearly 11 percent of the total cash receipts for all U.S. farm
crops .
Nursery and greenhouse crops in 1992 ranked 6th in total grower
cash receipts among all farm commodities — ahead of such major
crops as wheat, cotton and tobacco. Nursery and greenhouse crop
production now ranks in the top five agricultural commodities in
23 states, and in the top 10 in 42 states, including 13 of the
states represented by Members of this Subcommittee.
This impressive industry record of growth becomes even more so
when one considers that unlike other segments of agriculture, the
nursery industry does not receive — nor does it desire — any
federal subsidies or price supports. What we do want is for the
unique nature of nursery crop production to be fully recognized
as part of agriculture and for this recognition to be reflected
appropriately in any reform of the federal crop insurance
program.
Garden Centers o( America /Horlicumjral Resocfch msfthjle /NotkXKil Association of Plant Patent Owners/
IMational Landscape Associalion/Wtxjiesale Nursery Growers of America
338
NURSERY CROP PRODUCTION
Nursery crop production is a unique segment of agriculture, but
it is agriculture nonetheless. Unlike fanning operations of many
of the "major" commodities, most nursery crops are not harvested
in the same year in which they are planted. Moreover, although
they may be planted at the same time, not all such nursery crops
are then harvested at the same time.
As with other agricultural crops, nursery stock is generally
planted in rows — either in the ground or in containers — and
is cultivated by farm equipment similarly used by other farmers.
Most nursery farms grow hundreds of different varieties of plant
species which often require individual attention, so the labor
activity can be more intensive than other agricultural crops.
As an example of the unique nature of growing nursery plants,
let's examine the production of ornamental evergreen trees. Some
types of evergreens are first propagated from cuttings in a
greenhouse. Others are propagated from seed. After several
months in the greenhouse, the rooted cuttings (some of which may
be sold to other nursery farms) are planted in beds, usually for
two more years. These three-year old cuttings (some of which
again may be sold to other nursery farms) are then transplanted
in fields or in other containers and cultivated for as many as
four or five additional years until the trees begin reaching
various marketable sizes. As other examples, rhododendrens may
be grown for four to six years or more before they reach
marketable sizes, and landscape specimen shade trees may be grown
for ten years or more.
Seldom does a nursery farmer sell an entire "crop" in any given
year. For example, evergreens planted in the field at the saYne
time will not contain trees of uniform size. This is due, in
part, to each plant's individual rate of growth, or perhaps to
variations in soil quality in different parts of the field. As a
result, when a nursery grower receives an order from a retail
garden center or a landscape firm for ornamental evergreens of a
given size, the order may be filled out of several fields of
trees of varying ages.
As with other agricultural commodities, nursery crops are subject
to insects, pests, and diseases. Unlike most other agricultural
crops, nursery plants are often shipped with soil attached.
Since soil increases the likelihood of harboring pests, a variety
of federal and state certification and quarantine shipping
requirements are imposed on nursery growers to prevent the spread
of such pests to other agricultural crops even when such pests
are not directly injurious to nursery plants.
339
THE FEDERAL CROP INSURANCE SYSTEM NEEDS TO BE OVERHAULED
Since many nursery crops often take several years in the field
before they are ready for harvest, nursery farmers endure wide
weather swings and patterns over a multi-year period. In any
given year, nurserymen may lose farmgate sales of tens of
millions of dollars in plant material destroyed by the vagaries
of nature.
Nursery farmers traditionally absorb these losses and treat them
as costs of conducting business. The weather patterns of freezes
and droughts are often unpredictable. The toll is obviously
heavier and more costly in some years than in others. As noted
earlier, the nursery industry does not receive any federal
production subsidies or price supports, and we desire as little
government interference as possible. In turn, nursery farmers
have historically not looked to the federal government for direct
federal assistance.
Given the nursery industry's strong and continuing aversion to
turning to the federal government for direct financial
assistance, there is, nonetheless, an important mechanism by
which the federal government can partner with the nursery
industry. It is one in which the nursery industry, and the rest
of agriculture, could pay its fair share. AAN recommends that
the availability of federal crop insurance be broadened to all
agricultural crops, and that its purchase by farmers be made more
economical. We are pleased that H.R.4217, the "Federal Crop
Insurance Reform Act of 1994," introduced on April 14, 1994 by
House Agriculture Committee Chairman Kika de la Garza and the
Chairman of this Subcommittee, Rep. Tim Johnson (D-SD) , largely
embraces AAN's position. ^
The availability of federal crop insurance to the nursery
industry is severely limited. In part, this is due to the often
multi-year production periods for most nursery crops, as well as
the tremendous diversity of nursery crops. Even in those limited
instances where crop insurance is availaUale to nursery farmers,
the premiums are excessive and unaffordetble. By iiniversally
broadening federal crop insurance to all agricultural crops,
costs can be pooled and risks can be spread more effectively.
Only when federal crop insurance is availeU3le to nonprogram
crops, such as container and field-grown nursery crops, will the
insurance system succeed in attracting a sufficient pool of
farmers and growers so that costs can be spread more widely and
the premiums can be more economical.
Current USDA disaster assistance prograuns can unintentionally
340
reward marginal farmers who, if only they were to change some of
their management practices, could mitigate or even avert some of
their crop losses. By the same token, current USDA disaster
prograuns are often off-limits to strong and innovative farmers
who make investments in their operations (such as implementing
irrigation systems to combat droughts) in often successful
efforts to minimize crop losses. Federal crop insurance premiums
could reflect such investments and management practices.
Crop insurance for nonprogram crops would strengthen the
financial position of the insured in dealing with freezes,
droughts, and other reasonably anticipated and periodic weather
swings and patterns. Crop insurance can act as collateral on
loans, and lowers the risk factor enabling lenders to offer
better terms or larger loans.
Universally broadening the federal crop insurance system to all
agricultural crops, and making such more economical, would
present potential budgetary savings. It would mitigate the need
for Congress to continuously find itself year-in and year-out
having to appropriate huge sums of federal dollars to USDA
disaster assistance progreuns, which, unfortunately, have often
been outright grants to marginal agricultural producers.
AAN strongly urges Congress to puruse the goal of universally
broadening the availability of federal crop insurance to all
agricultural producers for all crops, and making the premiums
more economical. H.R.4217 is a positive first step in this
direction. AAN recommends that an overhauled federal crop
insurance system should cover reasonably anticipated weather
swings and patterns (such as freezes and droughts) which damage
or destroy agricultural crops. In so doing, USDA disaster
assistance programs could then be revamped to help restore n
farmers' lost income due to catastrophic disasters, such as
1992 's Hurricane Andrew or last summer's severe Midwest floods,
for which crop losses could not be averted no matter what
precautions are implemented by farmers.
H.R.4 217 MUST BE AMENDED TO EXPLICITLY COVER NURSERY CROPS
AAN understands that nursery crops — both container and
field-grown — are included on the official crop expansion
feasibility study list for the development of new crop insurance
programs, AAN applauds this review of container and field-grown
nursery crops for inclusion as "eligible crops." At the same
time, though, we are deeply disturbed that section 4 of H.R.4217
(which proposes a noninsured assistance program for crops for
which catastrophic risk insurance is not available) is limited to
341
food and fiber crop production. We are concerned that if such
limiting language is included in any final legislation, it will
work against the insurance eligibility of nursery crops.
Since nursery crops are neither food nor fiber, the proposed
eligibility coverage in section 4 of H.R.4217 effectively
excludes nursery farms or production nurseries — creating a
wholly inappropriate and artificial wedge between the nursery
industry and the rest of American agriculture. H.R.4217 must be
amended to explicitly cover nursery crops (and other non-food
or fiber crops, such as sod) as eligible for insurance.
CONCLUSION
Mr. Chairman, AAN deeply appreciates this opportunity to share
our thoughts about reforming the federal crop insurance program
in general, and H.R.4217 in particular. We hope Congress will
work to overhaul the federal crop insurance system by universally
broadening its availability to all agricultural crops, including
nursery plants and trees, and by making the purchase of crop
insurance by farmers more economical.
AAN also urges that crop insurance premiums reflect the
investments and management practices made by strong and
innovative farmers to mitigate their crop losses. By overhauling
the federal crop insurance system, USDA disaster assistance
programs could be revamped to help restore farmers' lost income
due to truly catastrophic disasters, for which crop losses could
not be averted no matter what precautions are implemented by
farmers.
As always, Mr. Chairman, AAN is willing and ready to work with
you, the Members of this Subcommittee, the Federal Crop Insurance
Corporation, and USDA to make the federal crop insurance system
more equitable and available to nursery farmers. Thank you.
342
Testimony of Teny N. Barr
Chief Economist
National Council of Farmer Cooperatives
Before the
Committee on Agriculture
Subcommittee on Environment, Credit and Rural Development
Thursday, April 21, 1994
Mr. Chairman, my name is Wayne Boutwell. I am testifying today on behalf of
the National Council of Farmer Cooperatives (National Council). The National
Council is a nationwide association of cooperative businesses which are owned and
controlled by farmers. Its membership includes over 100 agricultural marketing,
supply and credit cooperatives, plus 32 state councils. National Council members
handle practically every type of agricultural commodity produced in the U.S.,
market these commodities domestically and around the world, and furnish
production supplies and credit to their farmer members and patrons. The National
Council represents about 90 percent of the nearly 4,500 local farmer cooperatives
in the nation, with a combined membership of nearly 2 million fanners.
Mr. Chairman I would like to begin my testimony by commending you and the
members of the committee for holding these hearings. It seems that every day the
farmers of this country are being advised to prepare for change from another
source. New sources of change include global competition, envirorunental and
conservation regulations, food safety regulations, new biotechnologies, and a
rapidly changing information technology. All of these changes bring new risks in
addition to the already present price and production risk.
For decades farmers focused on enhancing their production skills. In the 1970's
and 1980's farmers were told to also enhance their marketing skills. The focus into
the next century will be managing risk from a growing array of sources. The
subject of this hearing is one of the steps toward assisting farmers to manage their
risk.
I am not sure there is much that can be said about Federal Crop Insurance that has
not been said since the Federal Crop Insiu-ance Act of 1980 was signed into law.
The goal at that time was to replace disaster assistance programs with an expanded
and improved crop insurance program. The program was to run on an actuarially
sound basis and to rely, to the maximum extent possible, on the private sector for
delivery, service, and claims adjustment.
343
Since that time we have had a steady stream of studies, reports. Commissions and
hearings. The objective remains the same and we have 14 years experience with
what will not work.
The members of the National Coimcil of Farmer Cooperatives support the repeal
of ad hoc disaster assistance authority and the implementation of a catastrophic
crop insurance coverage as a supplement to the Federal Crop Insurance program.
To ensure wider participation, crop insurance at the catastrophic level should be
linked to participation in Federal commodity support programs and Farmers Home
Administration loans.
To be successful this merger of disaster assistance and Federal Crop Insurance must
be adequately funded. Unless the funding issue is resolved it is unlikely that the
necessary merger could be carried out. Most importantly, do not permit this
merger to proceed without an adequate level of funding. This program evolution
has been underway for 14 years and it is important that we not have another failed
experiment.
With respect to specific issues, I would like to make a few observations. First, it
is clear to our membership that the "devil is in the detail". The translation of all
of the issues under discussion into premiimis, coverage and delivery will ultimately
determine the success of the program. I have seen extensive discussion on
modifications to the existing programs, but no one has translated those
modifications into premiums across the various commodities and regions. It would
be useful if premium assessments could be prepared on alternative choices.
Ultimately the farmer will decide whether the premium reflects the value of the
coverage.
Secondly, please remember that the farmer is the customer and if you want a viable
program it must serve the needs of the farmer. The administrators and agents may
design a successful program from their viewpoint but it is the farmer and his risk
management needs that must be served.
Let me make a few closing comments on several issues:
a) Dual Deliveiy System - The objective of moving die program into the private
sector at some time in the future must be maintained. From the producers
standpoint the more quality sources a farmer can utilize to obtain risk
management alternatives the better he will be served. While the Farm
344
Services Agency may be a source for catastrophic coverage it cannot offer risk
management planning in addition to all of its other duties. Producers should
be encouraged to seek professional risk management advice when they are
enrolled in the catastrophic coverage. However, no matter what the source,
the minimum coverage should be available for an affordable fee established
by the proposed reforms. We should be seeking to broaden the delivery
system not to narrow its focus to existing distribution networks.
With respect to coverage levels, FCIC should evaluate providing additional
levels of coverage higher than the 75 percent level.
b) Provisions for Non-insurable Crops - With the elimination of disaster
assistance programs, a large number of currently non-insurable crops now
come under Federal Crop Insurance in the event of a disaster. Additionally,
many covered commodities have not been active participants in the crop
insurance program in all areas of the country. The National Council would
encourage FCIC to work closely with those industries in establishing an
information system upon which to base any disaster assistance.
c) Industiy Competition - The effectiveness of crop insurance reform will be
greatly enhanced by encouraging greater competition in rates and services in
the private sector. The market for risk management alternatives is expanding
rapidly with greater use of futures, options etc. The integration of crop
insurance into the array of services will facilitate its emergence as a risk
management tool.
The members of the National Council strongly support efforts to develop an
effective and efficient Federal Crop Insurance Program. We look forward to
working with the members of the committee on this important issue. Thank you,
Mr. Chairman.
345
Dakota Rural Action
Box S49 • Brookingj, South Dakota 57006 • 603-697-5204
Testimony, Dakota Rural Action
Before tlie U.S. House of ^Representatives
Committee on Agriculture Subcommittee on
Environment, Credit and Rural Development
April 21, 1994
Dakota Rural Action (DRA) is a grassroots, membership based organization located in South
Dakota. We have over 500 members who have organized tpgether to achieve and create a
sustainable society which will guarantee freedom and justice for future generations. One of our
long term goals is to address the man-made disaster of fam^ policy in part by reforming federal
crop insurance and changing the federal disaster program. We would like to make some
suggestions on the proposal to reform federal crop insurance which is before this subcommittee.
In the simplest terms, famiJy farmers want a federal crop insurance program which is simple,
offers real protection against disaster and is affordable. Too often the current system offers little
of no protection at a price which makes it a foolish choice for farmers to purchase.
We understand that one of the first purposes of this pro{)osal before you is to reduce the
roiC' s loss ratio from where it is now to 1 . 1 . We as tax payers would also 1 ike to sec the cost of
the program reduced but we warn you that it is necessary tobuild a program which offers a good
product to the customers, the farmers.
1. We support the proposal plans to use actual production history (APH). This will allow
producers to base their coverage on the history of their farm| and their farming techniques.
Instead of using yields which have been locked in for years, the yields will roll with cnanges in
farming techniques and with changes in land ownership.
However, we believe recording a disaster yield for faraners who have experienced a natural
disaster is unfair. We support a system in which a farmer irjay substitute the county average or a
previous year's APH yield in place of the disaster for a year, during which they experienced a
natural disaster. This will help keep farmers from being peilalized for occurrences which were
beyond their control. As fanners we would love to stop these acts of nature when they occur and
never collect crop insurance, but we can't and we shouldn't be penalized by having to include
disaster years in our production history.
This change will also help insure that people participate p the new federal crop insurance
program. The plan to increase farmer participation by linking federal crop insurance to the farm
program participation may fall short of expectations because many farmers are talking about
dropping out of the farm program due to new restrictions on'program paiticipants and reductions
in benefits from the farm program. The new federal crop insurance has to be a quality product
which will sell on its own merits.
2. iMore than four levels of crop insurance should be offered to insure that producers have the
maximum amount of flexibility. Some farmers will be willing to pay more for a higher level of
coverage. A 100 percent coverage level should be offered for those farmers who would like this
kind of protection. This could be, an option for farmers having trouble finding financing for
spring planting. With 100 percent insurance, a farmer could walJc into the bank with his policy
aad use it as collateral for an operating loan. At 100 percent coverage, federal crop insurance
would work like hail insurance. Hail insurance allows a farmer to buy a dollar amount of
346
coverage paying for it ac a set premium level. For example a faimcr may buy $100 an acre '
coverage for $8 an acre or $150 an acre coverage for $12 an acre. The benefits and costs are
clear, easily understood and dependable. Payments aie bas<:d on percentage of loss. If a farmer
covered for $100 an acre receive a 50 percent loss, the insurance will pay $50.
3. Another benefit of hail insurance is its simplicity. Federal crop insurance should be simple so
the customers know what they are buying. We need to get rid of confusing percentages ancf
useless quirks in the program. For example, the "T yield" is a term with only one pui^posc, to
make the program confusing. Instead of taking percentages of yields and giving it a new name.
Find one of the many yields already being figured by fanners and government agencies and use
it. Farmers have a lot of work to do and the time spent trying to figure out how much they are
covered and when they are covered, could be used more productively. In fact many famiers
don't have an exact ideaiabout vvliat their crop insurance coverage is until they have a loss.
4. The $50 per crop processing fee for the catastrophic level of crop insurance is simply a
subsidy for large farmers.- A farmer with 1,000 acres of wheat would pay 5 cents an acre while a
faimer with 100 acres of wheat would be paying 50 cents ah acre for the same coverage. This
should be changed so everyone pays a per acre fee for the coverage. Even though this fee is
proposed to be something other than a premium it still acts like an insurance premium and tlic
small producer ends up on the short side.
5. Tile payment level for prevented planting should be raised to 65 percent instead of 50 percent.
Last year, a lot of faiiners got everything into the ground accept the seed. This includes
expensive items like fertilizer, herbicide and in some cases insecticide. Under the proposed plan
all these farmers would have qualified for is the low coverage level of prevented planting. This
low coverage will not prevent farmers from going to great Extremes like flying on their seed to
qualify for their higher level of insurance and recapture the'costs of the inputs.
Disaster Reserve Proposal
DRA and the National Family Farm Coalition (NFFC) !would like to propose an expansion
of the Farmer Owned Reserve and make it a true disaster reserve program where farmers raise
grain on land tliat would have been set-a-side or take a percentage of their production for storage
until a disaster year. We would like the program to include a storage payment at the cunent
fanner storage rate which will help farmers put up the additional storage they need for the
reserve. The farmer would have to document the loss and fiave it verified by ASCS. The grain
would only be released from storage on a documented loss by a single producer or in the case of
a county-wide disaster. They then would be able to substitute this grain for lost crops.
ii !
We propose that this "self-insurance" program be offered in place of part of the
administi'ation's crop insurance reform program. We would propose that the disaster reserve be
put in place at the 65-70 percent production level. Tlie farmer could still purchase insurance to cover
their initial losses before the 65 percent levei.
The disaster resei^fe could help both diversified farmers with livestock as well as those
witliout. Livestock fanners would have enough grain in their bins to feed their livestock and
wouldn't need a disaster payment. They could have fed their animals with high quality grains,
keeping the rate of gain high and marketing them on time. (Quality feed in a disaster year is
worth more than a disaster payment which can only buy popr feed.
Grain fanners will receive the benefit of having quality grain to market in a disaster year.
The local economy would also benefit because this grain wpuld be sold locally the same as it
would in a good year. Elevators and main street businesses will all benefit. With today's
programs, fanners get a check from one government agency and sign it over to pay debts held by
another government agency.
We appreciate this opportunity to present written testimony on these issues.
347
fl6Pfl
AMERICAN SOD PRODUCERS ASSOCIATION
An International Organization Deaicatea to Advancement of tne Turfgrass Sod industry
«^p»»
OFFICERS 1993-M
POESiOENT ftcrwdScNMM
Gieannofiion Group inc
'400 hUuieOiloo Road
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B'oohmeaoe Sod Farm Ire
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FAX ,804. 883-6377
SEC Y TREAS J Dougus Baitwrrv
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PASTPRES M.i<eMoin%«
Waffen s Turt Nurses i«C-
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STATEMENT OF AMERICAN SOD PRODUCERS ASSOCUTION
TO THE HOUSE SUBCOMMITTEE ON ENVIRONMENT,
CREDIT AND RURAL DEVELOPMENT
Regarding H.R. 4217 - Proposal to Reform Crop Insurance
Presented by Douglas H. Fender
Ejtecutive Director
American Sod Producers Association
April 21, 1994
Mr. Chairman and members of the Subcommittee, my name is
Douglas H. Fender and I am the Executive Director of the American Sod
Producers Association. We appreciate the opportunity to submit a statement
regarding the availability of crop insurance for specialty crops like turfgrass
sod.
The American Sod Producers Association (ASPA) is a 26-year old, not-
for-profit association with members in 49 states in the United States, Canada
and 25 other countries. ASPA consists of over 600 turfgrass sod farm
operations that produce approximately 80 percent of the acreage sold each year
in the U.S. ASPA represents its members on federal issues of importance.
Crop insurance and disaster relief assistance are significant concerns to
ASPA's membership.
We want to preface our statement by commending the Administration
and the Subcommittee for their efforts to provide fanners with a rational
policy on the availability of federal crop insurance. Moving away from
reliance on federal disaster relief measures and toward crop insurance makes
fiscal as well as practical sense. However, Congress should recognize that an
effective and equitable crop insurance program must, at a minimum, provide
protection for the same agricultural commodities as presently are entided to
disaster relief assistance. Turfgrass sod is currently entitled to disaster relief
assistance under the terms of the 1990 Farm Bill. Prior to the Farm Bill,
however, turfgrass sod was excluded because of definitional ambiguities in
USDA assistance programs.
1855-A Hicks Road
Rolling Meadows, IL 60008
708/705-9898 (Fax 708/705-8347)
81-128 0-94-12
348
Legislation to expand crop insurance as an alternative to ad hoc disaster relief
legislation should ensure that turfgrass sod is included as an eligible crop. We are concerned
that the language of H.R. 4217 creates some doubt regarding the eligibility of turfgrass sod
and other specialty crops. As discussed below, definitional ambiguity in other USDA
programs has resulted in confusion and, in some cas^ the exclusion of producers of
turfgrass sod from benefits to which they should be enntled as an agricultural commodity.
Turfgrass sod farmers, like those producing nursery and other specialty crops, often
face challenges that other more traditional types of agricultural commodities do not.
Although turfgrass sod is considered an agricultural commodity under many federal and state
laws,' it is sometimes inappropriately excluded from federal benefits afforded other
agricultural commodities. This is often a result of oversight or lack of knowledge about its
production and harvest characteristics.^
Several statutes define the term agriculture to be "food or fiber.' Because turfgrass
sod typically is not considered a traditional "food or fiber" agricultural commodity, it is
important for the Subcommittee to understand that turfgrass production is nevertheless a
traditional agricultural activity. It is produced, cultivated and harvested in much the same
manner as other more familiar agricultural commodities. As a consequence, ASPA believes
that turfgrass sod farmers should have the same degree of access to crop insurance that other
agricultural producers are entitied to obtain.
ASPA's members' experience with disaster assistance in the past illustrates the
problems encountered in our industry and which will continue unless the proposed federal
crop insurance program includes within the definition of eligible crops specialty crops like
turfgrass sod.
For example, prior to the 1990 Farm Bill, turfgrass sod's exclusion from disaster
assistance resulted in part because it was not considered "food or fiber." USDA officials in
charge of administering disaster relief assistance felt constrained to limit relief to crops
falling within that narrow definition.
' The Departments of Agriculture, Labor, Treasury, and Commerce, as well as the
Environmental Protection Agency, all have laws and regulations that define and treat
turfgrass sod as an agricultural commodity.
' For example, under the Swampbuster program, producers of annual program crops
lose payments from USDA for wetlands converted into cropland after 1985. In defining
what is prior converted cropland for the broader purposes of the Clean Water Act, the Army
Corps of Engineers borrowed the Swampbuster definition of "agriculture" which is limited to
annual crops governed by the Swampbuster program. As a perennial crop, turfgrass sod,
along with all other perennials, was arbitrarily denied prior converted cropland status under
the Corps of Engineers definition.
349
Section 2244 of P.L. 101-624 (1990 Farm Bill) resolved the definitional problem in
the context of disaster relief. It included turfgrass sod among the "non-food or fiber" crops
determined to be eligible for disaster assistance. The 1993 disaster relief provisions
necessitated by the floods in the midwest last year also adopted this definition.
As the subcommittee moves forward with legislation to reform disaster assistance and
require the purchase of crop insurance, we request that it include turfgrass sod, nurseries and
other specialty crops within the provisions defining eligible agricultural crops. We ask that
turfgrass sod farms be allowed to participate in crop insurance in the same fashion as other
agricultural crops and that USDA be given the necessary guidance to achieve that end.
We are somewhat concerned, however, by the crop eligibility provisions of H.R.
4217. Section 520 of the bill would condition eligibility for catastrophic risk protection
coverage on the definition of a "person" as determined by the Secretary of Agriculture.
Since eligibility will be determined by regulations issued by USDA, it is critical the
legislation clarify, like the 1990 farm, bill that "non-food and fiber" crops are "persons" for
purposes of program eligibility.
In addition. Section 522(a)(1) of H.R. 4217 authorizes the establishment of a non-
insured assistance program. Coverage would be extended to all "commercial crops and
commodities for which catastrophic risk protection coverage is not available and that are
produced for food and fiber." Use of the term "food and fiber" poses a problem. As
previously discussed, turfgrass sod does not meet the traditional definition of "food or fiber."
To avoid the problems caused in crop disaster programs preceding the 1990 Farm Bill, we
strongly suggest that the definitional section of H.R. 4217 be amended to include turfgrass
sod and other specialty crops within the category of eligible crops.
Notwithstanding the fact that the 1990 farm bill includes "non-food or fiber" crops
within the definition of eligible crops, we raised these concerns with officials of FCIC. We
have been assured by officials of FCIC that turfgrass sod will be considered eligible for crop
insurance. While ASPA receives some comfort from such representations, it is preferable
that the legislation clearly evidence such an intent. We respectfully request the
Subcommittee's assistance to clarify the definition of eligible "persons" and the term "food
and fiber." Even though FCIC presently considers turfgrass sod to be eligible for crop
insurance, we believe more explicit definitions would reduce eligibility problems in
application of the program.
We look forward to working with the Subcommittee as it develops legislation to
reform federal crop insurance. We respectfully request the Subcommittee's help to eliminate
any definitional ambiguity in the proposed legislation that might exclude turfgrass sod
farmers from access to crop insurance. We will be glad to provide any additional
information regarding this issue. Thank you for the opportunity to present our views.
350
/-^ National >*i
Sunflower
I National^*! 4023 sutc street
Bismarck. ND 58501 (KiWI USA
Phone 7ai-221-S10l
ASSOCIATION FAX. 701 221-3101
The Nationai Sunflower Association (NSA) appreciates the
opportunity to express its views regarding the current Federal crop
insurance program and the Administration's reform proposal.
Traditionally, Bunf lower growers have par-ticipated in the crop
insurance program and would like to rely on a program more as a
risk management tool . There are several changes in the current
system that would improve its usefulness to sunflower growers:
1) Coverage for Solid seed Plant inq-Currentlv. sunflower producers
wishing to solid seed (narrow row spacing) sunflowers are not
eligible for Federal crop insurance coverage. NSA encourages FCTC
to change this outdated policy as a growing number of producers
favor narrow row spacing. Solid seed planting is easier, quicker,
and cheaper than conventional row spacing. Generally, less
chemicals and labor are required, and new modern drills are very
adaptable to this type of seeding. Narrow row spacing is
consistent with Soil Conservation Service (SCS) requirements for
cover and residue. In the event of a weed problem, two post-
emergent chemicals are now available to producers which control
most broad leaf and grassy weeds. NSA believes that producers
using the most environmentally sound and economically viable
farming practices available should be eligible for Federal crop
insurance .
2) Prevented and Late Planting Coverage-Prevented and late
planting are currently not covered under the standard policy for
sunflowers. Due to extreme weather conditions in the sunflower
production regions, prevented and late planting coverage is very
much needed and would improve the usefulness of the program.
3 ) Premium Price Selection for Confectionery Sunf lowers-The
National Sunflower Association believes there should be premium
price selection for confectionery sunflowers. The cost of
production is higher for confectionery seed, yet the crop insurance
price selection is the same as for oil-type sunflowers. NSA hopes
an appropriate price distinction between the two types of
sunflowers seed can be made.
4) New Regions for Coverage-Planting of sunflowers is expanding
Kansas, Colorado, and Nebraska. A number of counties in these
states are already eligible for crop insurance. However, as the
crop moves into new areas, we strongly suggest a reasonable
mechanism be put in place to allow additional counties to become
eligible for Federal crop insurance. The current system is
inconsistent and serves to discourage the natural spread of
production .
351
5) Program Consistency-Program policies are not always consistent
from one state to another. For example, confection sunflowers
planted in Colorado must be planted after fallow to be
eligible for crop insurance. This requirement no longer applies in
Kansas and Nebraska, and is contrary to SCS recommendations to
abandon fallow. Also, this policy is discriminatory against
Colorado confectionery sunflowers producers.
With regard to the Administration's reform proposal, sunflower
growers generally are supportive of the basic policy and direction.
We realize the need to move away from dependency on Federal ad hoc
disaster programs, and hope the catastrophic coverage plan will be
approved by Congress. There are several of measures included in
the proposal we would like to address:
1) Coverage Levels -Cove rage levels up to 85% should be available.
This level of coverage would truly provide insurance for good
farmers who suffer a bad crop year but do not qualify for the lower
levels of coverage.
2) Prevented and Late Plantings Coverage-As indicated in our
comments on the current program, prevented and late planting should
be available for all crops, including sunflowers.
3) Linkage to Farm Prooraas-NSA does not have a problem with
linking crop insurance to Federal farm programs. However, we would
like to see a cap set on the administrative fee charged for
catastrophic coverage. We agree a $50 fee per crop is reasonable.
However, any significant increase in the amount used for budget
offsets or to raise revenue would discourage participation.
4) Group Risk Plan-Thc National sunflower Association would prefer
using actual production records rather than the Group Risk Plan,
sunflowers are traditionally grown in states with large counties
which have diverse soils and weather conditions. The Group Risk
Plan is unfair to producers who suffer disaster conditions in one
portion of the county when the entire county does not incur the
same problems. Under this plan, producers with the disaster-level
losses would not qualify for assistance.
Again, the National Sunflower Association appreciates the
opportunity to express the views and interests of our producer
members regarding the Federal crop insurance program. We look
forward to working with the Subcommittee as consideration of the
reform proposal continues.
352
TESTIMONY SUBMITTED BY RANDOLPH NODLAND
DAKOTA RESOURCE COUNCIL - NORTH DAKOTA
TO THE ENVIRONMENT, CREDIT AND RURAL DEVELOMENT SUBCOMMITTEE OF
THE HOUSE AGRICULTURE COMMITTEE
April 21, 1994
We are in support of overhauling the disaster crop insurance
system. While the disaster assistance program has helped many
farmers through troubled times when they have lost their crops
the crop insurance progreim has not at all kept pace with actual
yield losses.
One of the other problems is that we have had a general failure
in farm policy in this country. The policy of keeping grain
prices low has placed many farmers in a position of consistently
being on the edge so that when a bad year comes along there is an
immediate need for disaster assistance. Grain producers are
receiving no more for their crops than they received 3 or 4 years
ago, yet productivity costs have tripled or quadrupled in that
time. It now takes 15-20,000 bushels of wheat to purchase a
medium size tractor that could be bought for 5 thousand bushels
of wheat 30 years ago.
We do believe that there is a continued need for federal disaster
assistance. We support a program where farmers can help provide
their own insurance through a bushel-based disaster reserve for
losses not covered by the catastrophic 'disaster assistance.
The disaster reserve would work somewhat like the fanner owned
reserve, except it would not be eligible for CCC loans or
marketing until the farmer had yield losses below the normal
yield. The farmer would then apply to the ASCS for release of
enough bushels to cover their losses.
The grain for this disaster reserve has to come from somewhere.
Given the current state of farm production costs and the farm
economy, it is unrealistic to assume that farmers would "donate"
to the reserve from their normal production base. We support a
bushel based program or acreage set-aside program to have some
mechanism of establish a level of production that meets real
needs. Allowing full production for the sake of exporting a lot
of grain at below cost of production. It only ensures that many
farmers continue to remain below the poverty line.
A
r
353
We support a program where the fanner would be allowed to grow
crops for the disaster reserve on what would have been set-aside
acres or to develop a percentage of overall production that could
be produced on other acreage. This grain would be isolated from
the market. It should not be used as a club to drive down grain
prices. When a producer has built up the reserve to reasonable
level, for instance, enough for a total year's loss or at least
enough to cover losses not covered by disaster assistance. The
set-aside should revert back to a conservancy use to be kept in
reserve for future use .
A progreun like this would help create a stable supply. When a
major disaster strikes U.S. farmers, such as the 1988 drought, or
the floods of 1993, the grain in the disaster reserve would
ensure that consumers would not be hit with shortages and farmers
would have grain to sell.
At the very least the disaster reserve program should be offered
as an option to crop insurance to farmers. The grain in the
disaster reserve should be eligible for rollover each year to
insure it remains in good condition. Storage payments should be
paid on the grain and a cost-share to cover the costs of building
storage facilities.
We urge that you include the disaster reserve concept as part of
the Federal Disaster and Crop Insurance program.
354
TEXAS WHEAT
PlOOUCItS ASSOCIATION
803 FifstBank Southwest
2201 Civic Circle
AMARILLO. TEXAS 7910908S3
Telephone 18061 357 2191
March 28, 1993
The Honorable Larry Combest
Member of Congress
Field Information Session
Lubbock TX
Dear Congressman Combest:
On behalf of the members' of the Texas Wheat Producers Association (TWPA) I would like
to thank you for your leadership on crop insurance reform. 1 have had an opportunity
to discuss the crop insurance reform proposal within our organization as well as with
board members of the National Association of Wheat Growers. The following is a
condensed version of the concerns, comments and questions that were expressed.
First, TWPA is unwilling to step away from standing disaster authority. We recognize
that while some firewalls against future disaster bills may be needed to fund reform,
but the best way to prevent the need for future disaster legislation remains an adequ-
ate, workable, affordable crop insurance program.
The change to the new, more aggressive APH formula has not been without pain. Whether
a reform package moves through Congress or not, the highest priority for FCIC should
be to develop and implement a catastrophic yield clause to put the brakes on yield
declines for producers with multiple catastrophic losses. At the same time, the decision
to base catastrophic yield coverage from individual APH yields as opposed to county aver-
age yields Is a vital and important component of the current reform package.
Another issue which must be addressed whether or not there is a reform package is the
need for a de minimus yield clause. The lack of a de minimus yield clause for small
grains continually makes a mockery of MPCI coverage when farmers with 100% losses have
their payment reduced by 2 or 3 bushels an acre because an adjuster has appraised the
yield at that level. This inequity is further exacerbated by ASCS having a de minimus
policy while crop insurance continues to lack such a clause.
TWPA understands the desire and pressure for FCIC to expand coverage to new crops. How-
ever, we don't want to see limited resources spread too thin while the program is still
inadequate to meet the needs of the seven commodities that comprise 75% of the existing
crop insurance business and most of the potential business. One of the first issues FCIC
should explore whould be to develop a seed wheat policy for producers raising high-value
seed wheat. These producers tend to be very low risk with adequate production records
however, they may not utilize crop insurance due to inadequate price protection compared
to the higher value of their crop.
The 1995 FCIC Small Grains Policy, Federal Register, Sec. 6 provides ... for early term-
ination of acreage to be grazed, or destroyed by other means. If such acreage is
damaged to the extent a loss is payable, a claim can be filed and paid before destruction
355
The Honorable Larry Corabest
Page :uo
for ASCS. Full preminum will be due on this acreage. If no claim is payable on such
acreage, the premium will be reduced and the acreage can be disposed of, by any means,
and reduced at ASCS. It is important to Texas wheat producers that the above provisions
remain in any future revision and final language for FCIC provisions.
Thank you for advancing the reform proposal, many of the items in this letter arc
long-standing concerns that can be addressed independently of crop insurance reform.
TWPA looks forward to working with you on the reform package. Additional questions are
being submitted for your attention and review by FCIC.
Sincerily yours
Rodney Ho^er
Executive Assistant
356
tron.: •ii:.XAS WUhAl FKUUUChKS Ab^UCiAXio:^;
FEDERAL CROP INSURANCE CORPORATION
REFORM QUESTIONS
1. The reform proposal book contains examples of disaster and crop insurance
comparisons for corn, cotton and soybeans. Will FCIC run the same comparisons
for wheat?
2. Can existing policy holders get catastrophic coverage based upon their crop
insurance units as opptosed to whole farm coverage?
3. How will the catastrophic program work with companion hail? Will it combine
with hail insurance for' those farmers that don't need or desire MPCI?
4. Will wheat not enrolled in the farm program be eligible for the catastrophic
gram?
5. How will the $50 fee be applied in the case of crop share or similar agreements?
Could the fee Instead apply to ASCS farm number or units?
6. Has FCIC considered expanding the principles of non-standard classif iciation to
agents, adjusters and companies?
7. Few farmers in the traditional wheat belt are interested in the GRP program
and would object fo further expansion of the program. However, would FCIC consider
offering GRP to wheat producers in those counties where GRP is offered for soybeans
that are double cropped with wheat?
8. The experience this fall with the wheat price election served to illustrate the
folly of tieing the market price election to the world agriculture outlook board.
Can the price election process be modified to take into consideration the market-
ability of the insurance product?
9. As a marketing tool, can a good experience discount be developed to provide a
discount to existing insureds while minimizing snail claims?
357
NACI/\
NATIONAL'ASSOCIATION'OF-CROP'INSURANCE'AGENTS
April 20, 1994
The Honorable Tim Johnson
Chairman
Subcommittee on Environment, Credit
and Rural Development, Committee on Agriculture
House of Representatives
1301 Longworth House Office Building
Washington, D.C. 20515
Dear Congressman Johnson:
On behalf of the National Association of Crop Insurance
Agents ("NACIA") , I regret I was unable to accept your invitation
to testify before the Subcommittee on Environment, Credit and
Rural Development on the Federal Crop Insurance Reform Act of
1994. I am pleased to enclose for the record, however, copies of
a prepared statement as well as an analysis of the Reform Act
prepared by our counsel.
When the Federal Crop Insurance Corporation first heralded
its Reform Act, but before its provisions were public, NACIA
believed it would be able to put aside certain reservations and
support the Act's provisions. Indeed, I was privileged to stand
with Secretary Espy when he introduced the Act to the public.
Regrettably, however, the Act's provisions and the Act's
omissions require us to take a dimmer view than we originally
anticipated.
As explained in our statement, we now believe that the Act
confuses the respective roles of the Government and the private
sector; that the Act's costs will be higher than the Government
projects and its administration more complicated; and that., in
fact, a much simpler approach exists to the simultaneous
promotion of widespread participation and actuarial soundness
and, indeed, an approach that does not require legislation.
If any members of the Subcommittee or its staff have
questions concerning NACIA' s statement, please do not hesitate to
call me or Linda Vickers, our Washington representative. Again,
I appreciate your invitation to appear before the Subcommittee.
Sincerely,
Deanna Orwig
1706 23rcl Streets. • Suite 100 • Arlington, VA 22202-1552 • (703)979-5542
358
STATEMENT OF THE
NATIONAL ASSOCIATION OF CROP INSURANCE AGENTS
BEFORE THE
SUBCOMMITTEE ON ENVIRONMENT, CREDIT AND
RURAL DEVELOPMENT, COMMITTEE ON AGRICULTURE
HOUSE OF REPRESENTATIVES
April 21, 1994
THE FEDERAL CROP INSURANCE REFORM ACT OF 1994
The National Association of Crop Insurance Agents ("NACIA")
is pleased to submit its views on the Federal Crop Insurance
Reform Act of 1994 to the Subcommittee on Environment, Credit and
Rural Development. NACIA was organized in 1981 as a non-profit
corporation to foster a crop insurance program that will serve
the needs of America's farmers and, thereby, to promote the sale
of crop insurance. NACIA has been an active participant in FCIC
rule making proceedings and has regularly participated in the
legislative search for an improved crop insurance program to end
ad hoc disaster payments.
NACIA believes that the statutory declaration of purpose in
section 502 of the Federal Crop Insurance Act is the yardstick
against which the Reform Act must be measured. That section
states that it is the purpose of the Act "to promote the national
welfare by improving the economic stability of agriculture
through a sound system of crop insurance." Will the Reform Act
improve the economic stability of agriculture by making more
sound the present system of crop insurance or will the Reform Act
make the present system of crop insurance less sound and.
359
thereby, lessen the economic stability of agriculture? NACIA
believes the latter is more likely than the former.
I. THE GOVERNMENT'S RESPONSIBILITY AND
THE PRIVATE SECTOR'S RESPONSIBILITY
As will be shown below, the Reform Act blurs long-standing
lines that distinguish public sector functions from private
sector functions. NACIA believes that the blurring of these
lines is a fundamental defect of the Reform Act; it adds
uncertainty to the program, creates instability for its
contractors and, ultimately, will redound to the detriment of the
producer the program is intended to serve. NACIA believes that a
federal program that creates instability among those responsible
for its delivery cannot give stability to its beneficiaries.
A. UNDERWRITING AND LOSS ADJUSTMENT
In any insurance company there is always a tension between
the conflicting needs of actuarial soundness and maximum
participation. That tension is particularly acute in the Federal
crop insurance program where Congress has mandated, on the one
hand, that there be a projected overall loss ratio not to exceed
110 percent beginning October 1, 1995 and, on the other, that the
expense and inefficiency of disaster payments be eliminated
through maximum participation in the Federal crop insurance
program. Actuarial soundness precludes the acceptance of high
risk farmers but maximum participation bars their exclusion.
This tension is further exacerbated by a conflict between
the Reform Act and the draft of the 1995 Standard Reinsurance
2
360
Agreement ("SRA") the FCIC recently published for public
consideration. Section 2(d)(7) of the Reform Act amends section
508(h) of the Federal Crop Insurance Act, 7 U.S.C. § 1508(h), to
state, as here pertinent:
"The Corporation's reinsurance agreements with the
reinsured companies shall require the reinsured
companies to bear a sufficient share of any potential
loss under such agreement so as to ensure that the
reinsured company will sell and service policies of
insurance in a sound and prudent manner, taking into
consideration the availability of private reinsurance."
In other words, the Reform Act would require the FCIC to
transfer a sufficient share of loss (which is different than a
share of risk) to reinsured companies so that they do not sell
policies in a manner that is not "sound and prudent," taking into
consideration the availability (a factor that should include the
cost) of reinsurance. Because this section requires the FCIC to
punish reinsured companies that sell policies to high risk
producers when commercial reinsurance capacity is insufficient
for the risk, this section of the Reform Act clearly resolves the
conflict between actuarial soundness and participation in favor
of actuarial soundness. Parenthetically, the section does not,
as it should, direct the FCIC to increase the potential profit of
reinsured companies that sell and service insurance in a sound
and prudent manner.
Notwithstanding the fact that the FCIC drafted section
2(d)(7) and supports its enactment, the FCIC took the exact
opposite view in its draft 1995 SRA. That draft requires
reinsured companies -
361
"to make crop insurance available to all eligible
prof^ucers for the crops and in the areas which are
stated in its Plan of Operation as approved by FCIC."
Section II. A. 1.
This section, on its face, requires agents to sell policies
to all producers, even those who it is believed will present a
so-called "moral hazard" to the program. Compounding this
felony, the SRA then places on its contractors (and, by
implication, their agents) the burden of proof they are not, in
any way, responsible for the shenanigans these policyholders
might pull. Thus, the draft 1995 SRA resolves the conflict
between actuarial soundness and participation in favor of
participation .
To resolve the tension between actuarial soundness and full
participation, the FCIC must recognize that while crop insurance
is a form of catastrophic insurance there are, in the universe of
catastrophes, so-called "normal" catastrophes that can be
underwritten by the commercial insurance industry and cataclysmic
disasters, such as the drought of 1988 and the flood of 1993,
that the commercial insurance industry simply does not have the
surplus to underwrite. Because the risk of cataclysmic events is
not a true insurance risk, the indemnification for losses from
those events is a form of domestic assistance that can only be
borne by the Government, which is precisely why the Federal crop
insurance program is included in the Catalogue of Domestic
Assistance Programs.
The Reform Act does not recognize the difference between the
insurance risk that commercial companies should assume and the
4
362
catastrophic risk that the Government must assume. For example,
the Reform Act does not state who will underwrite the losses on
the catastrophic coverage that is the essence of the Act. This
is an ominous omission; if the FCIC intends to burden the
insurance industry with liability for the catastrophic protection
that will be available to all and without a premium charge to
any, the fundamental premise of section 502 will be undermined.
Societal costs cannot be assumed by "a sound system of crop
insurance" unless the insurance system can spread its losses
among all the members of society.
Similarly, the Reform Act does not specify who will adjust
losses covered by its catastrophic risk protection plan. This
silence, too, is unfortunate and deserves inquiry. Does the FCIC
intend to assume responsibility for adjusting these losses,
either directly or through local ASCS offices? If so, is this
the first step in a preconceived plan to eliminate commercial
insurers, their agents and their adjusters from the federal crop
insurance program? If not, why is the Reform Act silent?
B. THE DUAL DELIVERY SYSTEM
At different times NACIA has been given two different
reasons for the Reform Act's dual delivery system. Each reason,
however, creates its own contradictions between different
sections of the Act.
We first understood that the Reform Act created a separate
government delivery system to process applications for
363
catastrophic risk protection because the FCIC expected the market
to divide itself: producers who wanted only catastrophic
coverage would gravitate towards a government office and
producers who wanted higher levels of protection would contact
their agents. If the FCIC forced producers who wanted only
catastrophic coverage to spend time with an agent, there would be
a backlash of complaints that would undermine the Reform Act.
This justification for a government delivery system,
however, is in conflict with the expense reimbursement formula
the Reform Act creates. Under that formula, the expense
reimbursement for selling higher levels of coverage is greater
than for selling lower levels, even though the cost of selling
both levels is the same. The admitted purpose of this disparity
is to encourage the sale of higher levels of production because
those levels are consistent with the public interest. If higher
levels of coverage are in the public interest, however, why
should the Reform Act create a mechanism to divert producers away
from agents who, alone, are qualified to explain the benefits of
higher protection? Instead, the Reform Act should funnel
producers to their nearest agent's office.
NACIA was later informed that the FCIC does not expect the
market to divide itself. Instead, the FCIC expects that
producers who want catastrophic coverage only will visit agents
and producers who want higher levels of coverage only will visit
government delivery offices. According to the explanation, there
are certain geographic areas that are underserved by agents and
/
364
because the FCIC cannot define "underservice, " it will provide an
alternate delivery system everywhere.
This theory is inconsistent with the mechanism the Reform
Act creates for the sale of catastrophic coverage. Producers who
purchase catastrophic coverage must remit $50 with their
application to the government office or private sales agent.
Because that check will be deposited in the U.S. Treasury, it
must be transmitted promptly to a federal reserve bank. If a
producer who purchased catastrophic coverage from a government
office later decides to purchase a higher level of protection,
the government office would have to send the producer's file to
the agent and the government would have to refund the $50 check.
The problems of massive transfers of policyholder files, of
creating an audit trail for the collection, remittance and refund
of tens of thousands of $50 checks, and the paperwork that will
be created for agents and government employees alike are the
antithesis of reform. In this regard, on March 19, 1994, the
Washington Post reported that Senator Leahy was investigating the
ASCS Miami, Florida office which had stored up to $25 million in
negotiable checks in a file cabinet. According to the Post, the
office had no automated system for keeping track of its checks
and had no way of being certain of the value of the checks on
hand, how many had been mailed to entitled producers or whether
some had been stolen and fraudulently cashed.
Private agents cannot deliver catastrophic risk coverage on
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an individual yield basis for $50 per crop per producer, not to
exceed $100 per producer per county. An actual production file
for a typical producer may be an inch thick; it entails hundreds
of entries and scores of calculations. The labor involved and
the legal liability agents invite for innocent error under the
FCIC's new standard of strict liability cannot be recompensed for
$50 or $100.
In short, if it is the judgment of Congress that
catastrophic risk protection must be delivered for remuneration
less than the cost of delivery, there must be a dual delivery
system and the Government must assume responsibility for the
delivery of that plan. On the other hand, if it is the judgment
of Congress that the reasonable and allocable costs of agents are
to be reimbursed, a dual delivery system is unnecessary; indeed,
it is wasteful of federal funds and inconsistent with public
policy.
At least since 1921 and the passage of the Budget and
Accounting Act of 1921, the civilian procurement of supplies and
services has been a fundamental public policy. That policy is
presently enunciated in 0MB Circular A-7 6 which states, in
pertinent part:
"The Federal Government shall rely on commercially
available sources to provide commercial products and
services. In accordance with the provisions of this
Circular, the Government shall not start or carry on
any activity to provide a commercial product or service
if the product or service can be procured more
economically from a commercial source." (See, also 0MB
Policy Letter on Inherently Governmental Functions, 57
F.R. 45096 et sea. . September 30, 1992).
366
In 1980, Congress was able to make crop insurance available
for all crops in all counties because it amended the statute to
enlist independent insurance agents in the sale and service of
crop insurance. Those agents have been as successful as the free
disaster payments that compete against them have permitted them
to be. Indeed, those agents have been so successful in the sale
of reinsured policies that for years now the FCIC has recognized
that a dual delivery system for the sale and service of FCIC
policies was wasteful and should be abolished.
In this regard, the FCIC's own records disclose the
inordinate expenditures that were made to train ASCS employees to
sell Federal crop insurance and the inadequacy of their
accomplishments. In the first four months of 1992, the
Department of Agriculture spent $202,000.00 to train ASCS
employees to sell, service and adjust losses on Federal crop
insurance policies. As of that date, a total of 50 ASCS
employees had been trained to sell and service policies and two
ASCS employees had been trained to adjust losses. The return on
that $202,000 was two policies sold and one of those policies was
sold in error. The two policies were sold to a husband and wife
but under FCIC procedures a husband and wife must insure their
production together under one policy. Moreover, the policies
were not sold in a state in which there was an ASCS employee
qualified to adjust losses.
NACIA believes that, notwithstanding the FCIC's estimates,
approximately $250 million will be required to train the public
367
sector to compete against the private sector and that this
expenditure is not justified by experience, is wasteful of
private sector tax dollars and is inimical to the survival and
success of the Federal crop insurance program.
II. EXPENSE REIMBURSEMENTS
The FCIC reimburses its contractors' operating and
administrative costs based on a percentage of premiums.
Premiums., however, are a function of crop prices which, in turn,
are unrelated to the costs of selling and servicing multiple
peril crop insurance. Those costs are the same whether wheat is
$1.00 a bushel or $10.00 a bushel. Commissions based on the
former price, however, would bankrupt contractors and commissions
based on the latter price would unjustly enrich them. Arthur
Andersen addressed this problem in a 1989 study commissioned by
the FCIC:
"With respect to our evaluation of the current MPCI
expense reimbursement structure, we believe the
reimbursement structure, excluding consideration of the
underwriting gain, is not designed so that it will
always result in a reimbursement that is fair and
equitable to all parties. This is primarily because
the costs incurred by the contractors are not directly
dependent on the factors which determine the premiums,
yet the FCIC reimbursement is directly related to
premiums." p. IV.
"The FCIC should make a determination regarding which
of the contractors' costs are allowable for reim-
bursement and communicate the information to the
contractors, preferably within the contractor
agreements." p. 10
The Federal Acquisition Regulation defines the costs of
commercial contractors that are allowable expenses and regulates
10
368
the amount of profit government contractors can make. At
present, section 508(h) of the Federal Crop Insurance Act states:
"The Corporation shall also pay operating and
administrative costs to insurers of policies on which
the Corporation provides reinsurance in an amount
determined by the Corporation."
NACIA urges that this section be amended as follows:
"The Corporation shall reimburse the allowable,
reasonable and allocable costs, as those terms are
defined by the Federal Acquisition Regulation, to
insurers of policies on which the Corporation provides
reinsurance and pay a profit for the sale and service
of such policies, as authorized by law."
This amendment would subject the FCIC's contractors to the
same cost regulations that the Government has promulgated for all
of its commercial contractors and it would require FCIC close-out
audits of each year's reinsurance agreement, an important but
neglected discipline. Finally, we believe that this amendment is
one-half of the solution to a "sound system of crop insurance"
that will protect producers against natural disaster and supplant
disaster payments. The second half of that system is the
elimination of the cost of cataclysmic catastrophes from the
FCIC's rate structure.
III. CATASTROPHIC LOSSES
In 1982, Milliman & Robertson, consulting actuaries with
whom the FCIC contracted, recommended that, among other things,
the FCIC define catastrophic losses to differentiate them from
so-called "normal" losses. Milliman & Robertson suggested that
catastrophic losses could be defined in terms of the frequency of
loss, the severity of loss or both. In addition, we believe that
11
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catastrophic losses may be defined differently according to crop
or geographic area or both.
Catastrophic crop losses are not traditional insurance
losses for which commercial insurance and reinsurance are
available. For this reason, protection against catastrophic
losses should be viewed, as Congress all along intended, as a
domestic assistance component of the Federal program that the
Government must assume, if it is to be assumed at all. Moreover,
because catastrophic losses are not insurance losses they should
be excluded from the calculation of insurance premiums and loss
ratios.
The assumption of liability for catastrophic losses by the
FCIC and the concomitant deletion of the cost of those losses
from premium rates and loss ratio would have a significant,
salutary effect on the Federal crop insurance program. In five
years, we have witnessed two catastrophes of biblical proportion,
the drought of 1988 and the flood of 1993. If those two
catastrophes alone were eliminated from the FCIC's rate structure
and loss ratios, premium rates would go down, making the program
more attractive to more participants; the concomitant cost of the
FCIC's subsidy of those premiums would decrease; and
discriminatory underwriting practices, necessitated by Congress'
determination to achieve a 1.1 loss ratio because of fiscal needs
and not program needs, could be avoided because the FCIC could
more readily comply with the statutory requirement.
The FCIC has published for public comment a proposed
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definition of catastrophic losses. When defined, these losses
should be deleted from all premium and loss ratio calculations.
Because of the immediate, salutary benefits of such a rule, we
believe it is a viable alternative to the FCIC's proposal to
provide free insurance to farmers to protect 60 percent of their
yield at a 50 percent price election; the FCIC could use the
funds to be allocated to disaster insurance to subsidize
catastrophic losses and thereby make it possible for private
underwriters to assume the risk of "normal" losses. In addition,
if the Department abandons its contemplated second delivery
system, the cost of establishing that system would also be
available to fund catastrophic losses or premium subsidies.
IV. CONCLUSION
An essential element in "a sound system of crop insurance,"
which is the focus and concern of the Federal Crop Insurance Act
of 1938, as amended, is the elimination of ad hoc disaster
payments. While we may speculate whether the Reform Act will
contribute to that result, there is no question that the Act
carries too much baggage of its own creation. Thus, the trade-
off is not worth the gamble.
(Attachment follows:)
13
371
LEVIN Si ROSENSTEIN. P.C.
ATTORNCVS
SUITE 314
1 1 30 SEVENTEENTH STREET. N w
WASHINGTON. D C. 2003e
AREA CODE 202
TELEPHONE -429-1795
TELECOPIER 429-9729
ANALYSIS OF THE FEDERAL CROP INSURANCE PROGRAM ACT OF 1994
PREPARED FOR
THE NATIONAL ASSOCIATION OF CROP INSURANCE AGENTS
AND
RURAL COMMIJNITY INSURANCE SERVICES. INC.
The Federal Crop Insurance Reform Act of 1994 represents
another effort to eliminate ad hoc disaster payments. The Reform
Act would replace those discretionary payments with guaranteed
payments of catastrophic risk protection coverage to producers
who applied to a local government office or private agent, paid a
modest administrative fee, and suffered a 50 percent loss in
yield coverage. They would be indemnified at 60 percent of the
expected market price. Additional levels of protection would be
available only from agents.
At the same time, the Reform Act would also vest new
authority in the Secretary, tri.nsf erring to that Office judgments
that were previously made by the Congress and embodied in statute
and judgments that were entrusted to the Board of Directors of
the Federal Crop Insurance Corporation ("FCIC").
The FCIC's solution to the problem of disaster payments
brings a host of new problems and their solutions have their
problems. Thus, the Reform Act, in its totality, is a hodgepodge
of rubber bands and bolsters, balusters and glue holding together
81-128 0-94-13
372
a statutory structure whose angles are not right and whose joints
do not meet. The structure tilts acutely against private agents
and insurers and, if it collapses, it is upon them that it will
fall.
I. THE OFFER OF INSURANCE
The Federal Crop Insurance Act presently names each peril
against which loss is protected. Thus, at the time of the
purchase and sale of a crop insurance policy, the policyholder,
the agent and the insurer )cnow the insurable causes of loss
covered by the policy. Under the Reform Act, however, insurance
coverage will be available for losses due to "drought, flood or
other natural disasters as determined by the Secretary." In
other words, each year, as of the sales closing date, the
policyholder, the agent and the insurer may not know whether a
policy would protect against such perils as hail, wind, frost,
fire, excessive rain, tornado, insects or plant disease. Whether
those causes of loss are insured causes of loss would be left to
the sole discretion of the Secretary without any statutory
guidelines requiring a particular decision.
In this regard, the Reform Act, like the current law,
permits the deletion of fire and hail coverage provided it is
purchased commercially. However, because at the sales closing
date the Secretary may not have declared fire and hail to be
covered causes, there could be no coverage to delete. Thus, the
Reform Act forces producers to purchase fire and hail insurance
separately, a sharp reversal of current public policy.
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A number of undesirable consequences can flow from
unfettered Secretarial discretion. For example, the Secretary
can declare causes to be covered to curry political favor or may
decline to declare a cause covered for budgetary reasons or to
force Congress to revert to disaster payments. Concomitantly,
insurers might seek to have causes of loss not declared insurable
to protect diminishing surplus or to have causes of loss declared
insurable to increase sales.
The Reform Act should contain the current laundry list of
all insurable causes and, like the present law, leave it to the
Board of Directors to supplement that list. The more officials
empowered with such discretion, the less likely it is that such
discretion will be abused.
II. CATASTROPHIC RISK PROTECTION
As a condition for participation in any Department of
Agriculture benefit program for any crop or any loan program, a
producer must obtain catastrophic risk protection. The scope of
such coverage, however, is confused. New section 508(b)(5)
states that if a producer's crop on any land in the county is
covered, that crop on all of the producer's insurable land in the
county must be covered. On the other hand, new section 508(b)(6)
states that to qualify for any price support or loan program,
catastrophic risk protection must be obtained only on any crop
that has contributed or is expected to contribute 10 percent or
more of the total expected value of all the producer's crops.
While these formulas may not be mutually exclusive, one should be
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374
selected.
Catastrophic risk protection covers a 50 percent loss in
yield, on an area or individual yield basis, when both options
are offered by the FCIC, indemnified at 60 percent of the
expected market price (i.e. . coverage for a 30 percent loss) or a
comparable coverage as determined by the FCIC' Producers may
elect an individual yield and loss basis or an area yield and
loss basis. Coverage includes losses due to prevented planting.
The cost of catastrophic risk coverage is $50 per crop per
county, not to exceed $100 per producer per county. The producer
is to pay the fee at the time of application to the United States
Department of Agriculture ("USDA") or the agent. The fee is to
be waived in the case of limited resource producers or refunded
upon the purchase of additional protection. Assunedly, any
monies collected will be required to be remitted to the FCIC for
deposit in the United States Treasury because the funds collected
will only be available for salaries and expenses upon
appropriation.
Finally, if a producer applies for catastrophic risk
protection from a USDA office and then elects to purchase
additional coverage, the USDA office will have to transfer the
producer's file to the agent. In this regard, and for all levels
of coverage, the producer is required to:
' The Reform Act creates a noninsured assistance program to
provide coverage "equivalent to" catastrophic risk protection for
crops for which such protection is not available. This program
is discussed below, in section IX.
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(1) purchase insurance by the sales closing date;
(2) provide acceptable records of previous acreage and
production or accept a determined yield; and
(3) report acreage planted and prevented from planting
by the acreage reporting date.
The Reform Act's provisions for catastrophic coverage are
cumbersome.
First, if a producer does not apply for catastrophic risk
protection on a crop because it had not contributed and was not
expected to contribute 10 percent of the value of all of the
producer's crops, but, in fact, the crop does come to represent
that value, what happens? Second, the Reform Act does not state
what degree of loss in an area triggers catastrophic protection.
Third . giving a producer a choice of individual coverage or area
yield coverage invites adverse selection. Fourth, the actual
cost and potential liability of processing applications for
catastrophic coverage on an individual yield basis is too great
for the compensation allowed. Indeed, even on an area coverage
basis, the producer's administrative fee will not be adequate
compensation for the ministerial functions described below or for
the separate costs of loss adjustment. Fifth, requiring the
physical handling of tens of thousands of checks by government
employees and independent agents and the preparation and
recordation of receipts for each of those checks is an auditor's
nightmare. Sixth, requiring government offices to transfer their
policy folders to private agents in advance of the sales closing
date is impossible. Producers may not apply for catastrophic
376
protection until too late or may not decide until too late to
purchase increased protection. And, under the best of
circumstances such ministerial functions often are left undone or
done improperly. Seventh . what is the cost of refunding the $50
administrative fees to the producers who buy higher levels of
coverage and to whom wiJl it be left to process the complaints
when those fees are not timely or properly reimbursed?
It is no answer to the sixth objection that a producer who
procrastinates will have to suffer the conseguences of
underinsurance; that answer merely invites a return to disaster
payments. Nor is it an acceptable answer to permit government
offices to sell all levels of protection in order to lessen the
bureaucratic entanglements that the bureaucracy proposed. This
answer undermines the long-standing government policy of using
the private sector to perform the Government's commercial
functions.
Catastrophic risk protection should be limited to area
coverage and the Reform Act should specify the amount of damage
to a county that triggers the catastrophic risk coverage just as
the Reform Act establishes such a trigger for noninsured
assistance payments. All producers who suffer a loss egual to or
more than the trigger amount should receive 100 percent of their
catastrophic coverage and those whose crops suffered less should
receive a proportional lesser amount. Again, similar provisions
are made for noninsured assistance payments.
Moreover, in the event a county is declared eligible for
377
catastrophic risk protection, the FCIC should reimburse the
actual costs of loss adjustment in that county. Finally, payment
should not be collected at the time of application. Indeed,
until the application is accepted, there is no insurance for
which to pay. The charge for catastrophic protection should be
billed as any other crop insurance premium.
III. THE DUAL DELIVERY SYSTEM
The Refom Act creates a USDA delivery system on the theory
that producers who only want catastrophic protection will object
if required to visit an agent and listen to a "sales pitch" and
that their objections will be so loud and numerous so as to
undermine a single delivery system and, thereby, the entire crop
insurance program. The government also believes that there are
areas in which private agents will not deliver insurance because
it will not be economical for them to do so.
The government's rationale is flawed. First, producers can
tell agents they want only catastrophic protection and thus end
any "sales pitch" before it begins. Second, it is in the public
interest for producers to visit agents and be captive to their
"sales pitch." Catastrophic protection alone simply does not
pass the suitability test. Catastrophic protection does not
secure a loan; it does not cover annual operating costs; and it
does not protect against bankruptcy. In short, federal crop
insurance exists because catastrophic protection is not a
prophylactic. Indeed, if catastrophic protection was adequate,
why is each USDA office going to have available for distribution
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378
the names of all crop insurance agents in the county?
Finally, and notwithstanding the USOA's own estimates, we
believe it will cost approximately $2 50 million to develop and
train a federal sales and loss adjustment force. Certainly, for
far less the FCIC could make it economically feasible for private
agents to sell and service multiple peril crop insurance in those
counties where the delivery system may be inadequate. For far
less, the FCIC could train federal agents and adjusters just in
those counties that are not adequately served. And, perhaps for
less, the FCIC could buy the farms of those producers who want
crop insurance but absolutely have no way to buy it.
Apart from the long-standing public policy against a dual
delivery system, which RCIS and NACIA documented in their
respective testimony to the Subcommittee on Appropriations for
Agriculture, is the fact that a federal delivery system and the
private delivery system will not be audited by the same
government offices applying the same standards. In this regard,
it may reasonably be inferred from the conduct of the Compliance
Division and the Appeals Branch that there is, in the FCIC, a
philosophic antagonism towards the private sector. Under these
circumstances, any comparison of the two delivery systems will
suffer from an institutional prejudice that, like any prejudice,
is simply unacceptable and will redound to the private sector's
permanent detriment.
379
IV. CROP INSURANCE COVERAGE
A. Levels of Coverage
The Reform Act gives producers the option of purchasing
additional coverage based on an individual yield and loss basis
or on an area yield and loss basis, when both options are
offered, at 65 percent or more of the recorded or appraised
average yield and 100 percent of the expected market price, or an
equivalent coverage. The level of coverage is to be dollar
denominated and may be purchased at any level not to exceed 85
percent of the individual yield or 95 percent of the area yield
as determined by the FCIC.
The Reform Act requires the FCIC to establish a price level
for each commodity on which insurance is offered that -
(1) is not less than the projected market price, as
determined by the FCIC; or
(2) may be based on the actual market price at the
time of harvest, as determined by the FCIC.
Insurance coverage shall be equal to less than the level the FCIC
so establishes and shall be quoted in dollars per acre.
.4 *. -^
B. Premiums
The Reform Act requires the FCIC to establish premiums at a
level sufficient to attain an expected loss ratio of not greater
than 1.1. As to each level of coverage the Reform Act states:
(1) For catastrophic risk coverage (i.e. . 30 percent
coverage) , the amount of premium is to cover: (a) anticipated
losses; and (b) a reasonable reserve. The FCIC is to pay the
entire premium.
380
(2) For levels of coverage less than 65 percent of the
yield and 100 percent of the market price but more than
catastrophic risk coverage fi.e. . coverage between 31 percent and
64 percent), the premium is to cover: (a) anticipated losses;
(b) a reasonable reserve; and (c) operating and administrative
expenses which are to be less than the expenses allowed for the
highest level of coverage. The FCIC is to pay the premium share
covering the amount of premium established for catastrophic risk
protection plus (b) and (c) .
(3) For 65 percent and higher levels of coverage the
premium is to cover: (a) anticipated losses; (b) a reasonable
reserve; and (c) operating and administrative expenses as
determined by the FCIC on an industry-wide basis as a percent of
the total premium. The FCIC is to pay the premium share covering
a 50 percent loss in yield indemnified at 75 percent of the
expected market price plus (b) and (c) .
The Reform Act establishes expense reimbursements for
insurance with levels of coverage between 31 percent and 64
percent at a lower rate than for coverage at the 65 percent level
so that the FCIC may penalize agents who sell 31 percent coverage
to a producer who intended to buy 30 percent catastrophic
coverage. Under such a sale, the producer's $50 administrative
fee would be reimbursed and the agent would earn a full
commission. Thus, the Reform Act creates a formula for the
reimbursement of operating and administrative expenses to prevent
agents from selling the very coverage that the Reform Act creates
381
and authorizes them to sell.
The cost of selling and servicing a policy providing 64
percent coverage is no different than the cost of selling and
servicing a policy providing 65 percent coverage or a policy
providing 35 percent coverage and, yet, by law, the reimbursement
on the former must be lower than the reimbursement on the latter.
In addition, the Reform Act contains no formula for calculating
expense reimbursements at the lower level of coverage, whereas at
the higher level, expenses are to be determined on an "industry-
wide basis," whatever that term means and however those expenses
are to be calculated. Will companies that spend six percent of
premium on loss adjustment be reimbursed for only five percent if
that is the amount determined on an "industry-wide basis"? Will
companies that pay an average commission of 16 percent get a
windfall if the "industry-wide basis" is 18 percent?
Compounding this matter and, indeed, complicating the entire
issue of insurance delivery and contract compliance is a new
section 508(d)(3) which states:
"If a private insurance provider determines that it may
provide insurance more efficiently than the expense
reimbursement amount set by the Corporation, the
private insurance provider, if approved by the Board,
may reduce the premium charged the insured by the
amount of such efficiency. Any such reductions shall
be subject to the rules, limitations and procedures
established by the Corporation."
This section invites contractors to shortchange amorphous
but crucial components of contract responsibilities, such as
compliance, and rewards them with increased market share if they
are successful. At the same time, the section requires the FCIC
11 ^' •"' ""
382
to ferret out and negate, by new procedures and regulations,
every shortcut a contractor might invent. This is a battle of
wits the FCIC will lose sufficiently often to distort the
marketplace and sully the reputation of all of its contractors.
The Federal Acquisition Regulation establishes a government-
wide system for the compensation of contractors. Instead of
adopting that system, which compensates contractors for their
reasonable, allocable and allowable costs and permits them an
agreed upon profit according to an established body of precedent,
the Reform Act introduces caprice and uncertainty into a contract
system designed to eliminate both.
V. YIELD DETERMINATIONS
The Reform Act appears to mandate yield coverage plans based
both on actual production history ("APH") and on area yield. On
one hand, the Reform Act states that the FCIC "shall" provide an
APH plan and an area yield plan. On the other hand, two
paragraphs later, the Reform Act states the FCIC "may" provide an
area yield plan.
The APH yield plan uses the producer's APH for the four
previous, consecutive crop years up to a data base of 10 years.
If the producer does not submit adequate documentation, the FCIC
is to assign a yield of not less than 65 percent of the
transitional yield, adjusted to reflect available APH
documentation.
The area yield plan allows an insured producer to qualify
for an indemnity if a loss has occurred in the "area" in which
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383
the insured farm is located.^ The producer will be allowed to
select the level of area production at which an indemnity will be
paid. The producer may choose between individual or area yield
coverage on a commodity-by-commodity basis.
The section on area yield should make clear that the
producer in the damaged "area" must also have damage to be
indemnified.
VI. CLAIMS FOR LOSSES
The Reform Act introduces a new procedure for the resolution
of disputes between producers and insurance companies. Under the
Reform Act, the FCIC is to promulgate standards to ensure that
all claims are adjusted uniformly and timely. The Reform Act
then states that if a claim is denied by the FCIC, the producer
may bring an action against the FCIC and the insurer in the
United States District Court for the district in which the
insured farm is located.
Under these provisions, if an insurer denied a producer's
claim, the producer would not sue the insurer or institute an
arbitration action. Instead, we understand that the insurer
would appeal to the FCIC and a formal, administrative hearing
would be held before an administrative law judge ("ALJ") . If the
ALJ ruled against the producer, the producer could sue the FCIC
and the insurer.
' New section 508(b)(5), discussed above, requires "all
insurable land of the producer in the county" to be covered by
catastrophic risk protection insurance. Will an area be other
than a county for purposes of an area yield plan?
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This process is both inefficient and incorrect. First, it
eliminates alternative dispute resolution procedures, such as
arbitration and mediation. Second, if an ALJ denies a claim, it
then becomes the Government and not the insurer that issued an
appealable order; clearly, under those circumstances the insurer
should not be a party to the suit. In this regard, the
producer's appeal would rest on the Administrative Procedure Act
with which the Government must comply, not insurers. This
provision will substantially increase contractors' costs.
VII. REINSURANCE
The Reform Act mandates that the Standard Reinsurance
Agreement ("SRA") shall require reinsured companies -
"...to bear a sufficient share of any potential
loss... so as to ensure that the reinsured company will
sell and service policies of insurance in a sound and
prudent manner, taking into consideration the
availability of private reinsurance."
This section is curious. Insurance companies that sell
policies in "a sound and prudent manner" do not sell policies to
high risk producers or on high risk crops. And when insurance
companies take into consideration the lack of available private
reinsurance, prudence makes them even more risk adverse. This
section makes sense only if its purpose is to limit the
availability of crop insurance to producers whose potential loss
ratio will yield an underwriting gain. And this purpose is
contrary to the public policy underlying the Federal crop
insurance program, as demonstrated by the FCIC's own
interpretations and public statements.
14 P'
385
VIII. MISCELLANEOUS
The Reform Act makes the following changes in the Federal
Crop Insurance Act which changes are of varying import.
1. A technical change is made in the USDA's representation
on the FCIC's Board.
2. The Reform Act would give the FCIC the authority to
settle claims, an authority that now rests in the Justice
Department. This provision may cause the Reform Act to be
referred to the Judiciary Committee.
3. The Reform Act contains standards for the
disqualification of producers.
4. The Reform Act states:
"There is hereby appropriated, without fiscal year
limitation, such sums as may be necessary to carry out
the purpose of the insurance fund."
Appropriations are not customarily made in substantive laws;
funds are appropriated by laws limited to appropriations. This
provision should require the Reform Act to be referred to the
Appropriations Committee.
5. The provisions for reasonably compensating master
marketers for sales and renewals in section 507(c)(3) and for
indemnifying agents for FCIC errors are eliminated.
6. Local USDA offices will be required to make available
to producers current and complete information on all aspects of
federal crop insurance and a listing of insurance agents, vnio
will provide the listing? Who will verify its accuracy?
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7. Different persons may be eligible for catastrophic risk
protection insurance than for other plans of insurance. Any
producer that meets the definition of "person" as defined by the
Secretary is eligible for the former. A producer who is at least
18 and has a bona fide insurable interest in a crop as an owner-
operator, landlord, tenant or sharecropper is eligible for the
higher levels of coverage. This distinction is needless.
Moreover, it creates another audit responsibility and another
layer of record keeping.
8. The Reform Act authorizes the Secretary to establish a
permanent advisory committee to advise the Secretary on the
implementation of the Act.
9. The Reform Act is to t«Uce effect beginning with the
crop year immediately following its enactment. Different crops,
however, have different crop years.
10. The Reform Act neither defines nor sets forth standards
for the definition of the term "market price." This definition
is crucial to participation and should not be left to changing
administrative fiats.
IX MOWINSURED ASSISTANCE
The Reform Act creates a program of noninsured assistance to
provide the equivalent of catastrophic risk protection for crops
for which catastrophic insurance is not available. Noninsured
assistance does not cover losses due to: (1) the producer's
neglect or malfeasance; (2) the producer's failure to reseed to
the same crop where it is customary to do so; and (3) the
16
387
producer's failure to follow good farming practices, as defined
by the FCIC.
Producers must apply to the USDA for assistance; provide all
required records to the FCIC or accept a yield as determined by
the FCIC; and report acreage planted and prevented from being
planted by the acreage reporting date. Producers of non-program
crops are not eligible unless the area average yield for the
particular crop falls below 65 percent of the expected area
yield.
The FCIC is to make a prevented planting payment if the
producer is prevented from planting more than 3 5 percent of the
acreage intended for the crop. The FCIC is to make a reduced
yield noninsured assistance payment if the total quantity of the
crop that a producer is able to harvest on any farm is less than
50 percent of the expected area yield, factored for the
producer's interest in the crop. (Query, if a producer harvests
less than 50 percent of the expected area yield on one farm and
more than 50 percent on another, can the producer receive a
payment for both farms because a loss occurred on "any farm"?) .
A "person" (as opposed to a producer) who has qualifying
gross revenues in excess of $2 million is not eligible for
noninsured assistance payments.
Payments of noninsured assistance shall be made for losses
in excess of 50 percent of the established yield at 60 percent of
388
the average market price for that crop.' Payments under this
progran that a person is entitled to receive nay not exceed
$100,000.
March 14, 1994
' This section is poorly drafted. Literally, it states that
payments shall be mad* for losses in excess of 30 percent, i.e. .
"in excess of 50 percent of the established yield for the crop at
60 percent of the average market price." The section should
state "payments shall be made for losses in excess of 50 percent
of the established yield for the crop indBBPK^*** at 60 percent
of the average market price."
18
389
EXECUTIVE OFFICE OF THS PRESIDBNT
OPnCS OF MANAOIMINT AND lUMVT
WAawwroN, O.O. soaia
April 14. 1994
Bononible Maitin Olav Sabo
Cmnmitiec oa tl» Budget
U.S. Hooic of Sqiireseatativei
Wuhlostoii. D.C. 20S1S
DMT Mr. C3ialrman:
Laat month, the Dqmtmait of A(nciilture, oo behalf of fiia Administiation, unveiled
in innovitive |KOpoul to refism Ao Fedenl govenuoBot'i rale in helpin| &nnen itnick by
utmil dinsten. The plan comUna two lednndanl, npeuiive govenunent prognma -^
Fedenl oop iniuiaacc tnd Fedenl ad hoc diaster xeUef - into a angle, unified, on budget
pTQgnm. Ta the proccu, tutaea and tazpayen both benefit from greater oedalnly, and
taxpayoa aave $750 mtlllon in ftffidfinciaa over fiw jfcan.
This inidattve gicw directly fiom the Pnddent'i visits to tbt devastated Midwest
flood areas last sommcr. He and other Admlnistnlioa officials met widi many vlcdms of
that catastrophe, fiomen and noa-faimen alike, and the Administntion promised to make
govecament WQik better to deliver help in a crisis. Now, we must locq) dnt promiae.
Ai the FY 1993 budget lesolutlaa confiacnce convenes oeod week, I uige the
conferees to malm the needed yearly baseline a4)ustment of $1 billion to reflect histodcal
spending on crap disaster relief, so that our crop Insunnoe reform plan can move fiorwaid. I
strongly believe dut this baseline adjustment win more accurately reflect Fedenl govenunent
qwnding pacdoei and win result in a men icalistic FY 1993 budget jcsolulioo.
The Admbdstntlon's crap insurance jdan is a model for making government perform
better for people. It dlminales redundant prognnu, it promotea realistic budgeting, it relies
tm the private sector to deliver goveffimental assistancft, and 11 provides security and
confidence fot American pradnoen.
I hope you will support us In this Important e£R»t.
SlnceselT.
■X"'
390
Statement of Plains Cotton Growers, Inc.
On Proposed Federal Crop Insurance Reforms
Presented By Myrl D. Mitchell
March 29, 1994
I would just like to say a short thank you to Congressman Combest
and to Mr. Ackerman for taking the time to be here this morning. My name
is Myrl D. Mitchell and I am a cotton producer and ginner from Lenorah,
Texas. I am here today to present a few comments on behalf of the producer
members of Plains Cotton Growers many of whom are constituents of yours
Congressman Combest. As you are no doubt aware this area produces some
15 to 20 percent of the cotton grown in the United States each year. We plant
on average three to three and one-hsJf million acres of cotton in the 25
counties surrounding Lubbock. Through the years the need for affordable,
high quality income protection has been a constant for the producers in this
area. In fact many of the banks we deal with now require crop insurance
before a producer can obtain financing to grow his next crop. Through the
years cotton producers on the High Plains have becoine well acquainted
with Federal Crop Insurance and we believe their experiences shed light on
4
the good and bad contained in the current system. "
Making a viable crop insurance progreun available is vitally
important to the producers in this area. Like you, we believe that a move
needs to be made towards making Federal Crop Insurance work and away
from ad hoc disaster programs that, while helpful, often illustrates the old
saying "its too little, too late". Here on the High Plains, producers need a
responsive form of protection that allows them to protect themselves and
provide the greatest number of alternatives following a crop loss. Any
reforms that are made to the current crop insurance system need to be
391
fiscally sound, both from the government's point of view of limiting the
overall losses and from a producers point of view that the coverage provided
must be economically accessible and adequately meet his protection
requirements.
I would also like to point out that in the past producers often decided
not to take crop insurance because the potential return they could expect did
not adequately reflect the yields they typically manage for and count on to
msike a profit. Much of this is due to the adoption of many of the latest
tillage, irrigation and fertilization technologies that allow them to grow
more high quality cotton on the same number of acres. Accordingly a
method of developing yields for insurance purposes that more closely
matches the actual production capabilities of a farm or farmer is an
absolute necessity and I believe we are on the right path with the use of
Actual Production History (APH).
The last point I would like to make regarding the old crop insurance
system basically sums up what producers have felt about the coverage
available. The general feeling was that crop insurance cost too much and
provided too little protection in the event of a loss. This is probably the major
reason crop insurance has been underutilized as a management tool in the
past.
Now that you know some of the concerns producers have had with
crop insurance in the past, lets look at how the federal crop insurance
reform proposal addresses some of these issues. In general the current
proposal addresses most of the concerns we have voiced over and over
through the years. It has many changes that we wholeheartedly approve as
well as some things that we feel need to be explored further. The idea of
providing basic catastrophic coverage at a minimal cost, allowing
392
producers the option to purchase additional coverage levels up to 85 percent
of their insurable yields, and providing a mechanism through which a
producers true production potential is used as the insured yield are all
excellent suggestions. There are many more good points in the proposal,
however, I do not ^ave the time to get into them right now. We, the Federal
Crop Insurance Corporation, legislators and producers, need to continue to
work together to work out reforms that will make affordable, high quality
catastrophic crop insurance a reality. We have taken a giant step towards
achieving this goal and we welcome the opportunity to participate in this
process.
Along those lines there are several areas in which we feel further
work needs to be done. We would like to see more work done to refme
variables such as harvest incentives and de minimus j^elds that are fair to
both the producer and federal government. Improvement in adjustment
procedures and speedier adjustments are also high on the list of producers
looking for change. Again, these are only a few of the things that come to
mind. I'm sure that before this process is finished there will be a number of
further changes and that each will make the orerall package better and
more attractive to producers. In conclusion let me say that I appreciate the
opportunity to be here today and talk about some of the issues that are on the
minds of people from this area. We seem to be on the right track and the
proposed changes address many of the concerns and answer some of the
questions producers have about Federal Crop Insurance. Thank you.
393
Testimony of
William R. Weber
President and Chief Executive Officer
The Farm Credit Council
before the
Subcommittee on Environment, Credit and Rural Development
U.S. House of Representatives
April 21. 1994
394
Mr. Chairman and members of the subcommittee, thank you for allowing us the
opportunity to show our support for reform of the Federal Crop Insurance Program. I testify
today on behalf of the institutions of the Farm Credit System, which are committed to
working with the administration and this subcommittee to help provide farmers with a high
quality crop insurance product at an affordable price.
Farm Credit is in a unique position in the crop insurance industry. As a provider of
credit to production agriculture. Farm Credit depends on crop insurance to preserve the value
of its loan collateral. As a provider of crop insurance to its farmer/borrowers. Farm Credit is
keenly interested in the marketability of the product. Finally, as a cooperative owned and
directed primarily by agricultxiral producers, we advocate a crop insurance program that
provides farmers with the best possible tool to manage one of their most unmanageable risks -
- weather.
From each of these perspectives, the Farm Credit System supports the administration's
proposed crop insurance reform package. We congratulate Secretary Espy and his staff, and
especially Federal Crop Insurance Corporation Manager Ken Ackerman, on their proposal.
We also thank you and your subcommittee, Mr. Chairman, for quick consideration of the
proposal and for providing this and other forums across the country for farmers and others in
agriculture to express their views.
Today, I would like to make several points about the proposed legislation. First and
most important, since the Congress through its budget process will be making the initial
decision on crop insurance reform very soon, we urge members to vote for full funding of the
administration's proposed program.
By combining the money used for crop-related disaster payments with the money
already being spent on crop insurance. Congress can provide farmers with a high quality tool
to manage weather-related risks at a price that will attract enough participation to make the
program viable. With cunent crop insurance participation rates at just over 30 percent of
eligible acres, the program cannot be actuarially sound and affordable to farmers. To get the
kind of participation rate necessary for a true insurance program, the product must provide a
benefit that producers consider worth the price. Full funding for the proposal is crucial for its
success.
In addition, a budget-conscious Congress could find needed budget savings ft^om the
elimination of crop-related disaster payments. Almost every year, a region of the United
States faces severe weather or natural disaster. If it's not a flood, it's a drought. If not an
earthquake, then a hurricane. Under the current disaster program, the federal government's
costs are uncontrollable. In an atmosphere where the budget deficit is forcing hard decisions
in farm policy, cost control is critical.
The administration's proposal takes money that is already being spent, uses it to fund a
program that will provide farmers with the risk management tools they need at price they can
395
afford, and lowers the budget deficit. It's good farm and fiscal policy and the Fann Credit
System heartily endorses it. Again Mr. Chairman, we urge Congress to fully fund the
administration's request. Inadequate funding severely limits the possibility for workable
reform of the program and potentially exposes U.S. fanners to uncontrollable risk.
My final two points are more technical details and concern the proposed dual delivery
system and the processing fee for the catastrophic product.
Dual Delivery System
Currently, when they purchase crop insurance products, farmers have the benefit of
service from trained professional crop insurance agents, be they located in insurance agencies,
banks, Farm Credit institutions, or elsewhere. Risks and needs vary across the nation, and
farmers need sound advice when they try to decide which insurance product is right for their
particular operation.
Farmers benefit from the professional advice they receive when purchasing insurance
from an experienced insurance professional. Under the proposed dual delivery mechanism,
USDA will be forced to absorb the huge cost of training its staff to essentially do the job
private agents are already prepared to do. We are also concerned that because USDA would
offer only catastrophic coverage, farmers would be left with the impression that government is
advocating only this level of coverage.
We agree that in some areas of the United States, the capacity of the private crop
insurance delivery network will be unable to handle the increase in volume once the
mandatory participation requirements are in place. The Farm Credit System, with 238 local
lending institutions and almost fourteen hundred local offices nationwide, can help ease the
burden. We hope to work with the committee to explore options in this area and to preserve
the private delivery system.
Processing Fee for Catastrophic Covera2e
Under current practices and procedures required for participation in the crop msurance
program, a SSO fee for processing an application is probably insufficient for most institutions
to cover the cost of necessary overhead. However, with participation in the catastrophic
program a condition of participation in other USDA farm programs, it is very important to
keep down the cost to producers.
By significantly reducing the paperwork process, it might be possible to provide
farmers with the lowest possible fee requirement without requiring private insurance vendors
to lose money when they take a catastrophic application. It might be possible to streamline
the application needed to obtain catastrophic insurance coverage.
Agents could collect only a very limited amount of information at application time.
One page of basic data about the producer and his or her operation might be sufficient Only
af^er a producer filed a claim, would more detailed information, like proof of yield, be
396
required. Producer and agent alike would benefit from such an arrangement.
In summary Mr. Chairman, the Fann Credit System supports the administration's
efTorts to reform the Federal Crop Insurance Corporation's programs. We remain concerned
however, that the program will receive inadequate funding. Without adequate fimding, the
program has little chance to offer the high quality risk management tool fanners need.
We look forward to working widi this subcommittee and the administration toward
swift enactment of the proposal. Thank you again for this opportunity to testify.
o
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